IT WASN’T AS BAD as shoving a reporter in front of an oncoming subway train, but it was still a move worthy of Frank Underwood, the unscrupulous, conniving pol at the center of Netflix’s House of Cards (who, spoiler alert, offs a journalist in just such a manner during the show’s second season). The move was calculated, cold, and ultimately bad for the people whom government is supposed to serve, much like nearly everything Underwood does in his unstoppable quest for Oval Office power—except it occurred in real life, to actual lawmakers and a real, live taxpaying public.
House of Cards had been filmed for its first two seasons in parts of Maryland, including downtown Baltimore, thanks in part to a generous subsidy program provided by the Maryland legislature. For season three, though, state lawmakers were threatening to yell “cut” on the flow of money, questioning whether the use of public dollars was worthwhile to subsidize a popular, successful TV show that aired on a premier website and seemed as if it could support itself in the absence of public funds. “It seems to me that House of Cards isn’t doing so badly that it needs taxpayer help,” said state delegate Kathy Szeliga.1
And so the arm-twisting began.
In a letter sent to Maryland’s governor, Martin O’Malley, Charlie Goldstein, a senior vice president of Media Rights Capital, the show’s production company, wrote, “While we had planned to begin filming in early spring, we have decided to push back the start date for filming until June to ensure there has been a positive outcome of the legislation. In the event sufficient incentives do not become available, we will have to break down our stage, sets and offices and set up in another state.”2 A similar letter was sent to the speaker of Maryland’s House of Delegates.
The threat was anything but subtle: Provide us enough “incentives”—i.e., taxpayer money—to stay, or we’ll take our show and all its Maryland jobs elsewhere. Underwood himself—or at least Kevin Spacey, the now-infamous actor who portrayed him—even personally lobbied Maryland lawmakers at an Annapolis wine bar in an effort to seal the deal. “We are enormously honored to be in this state,” he told the gathered representatives. “I can only tell you that every single day I go to work, there’s no doubt in my mind that the faces I look at of Marylanders are incredibly happy that we’re here.”3
That happiness was, perhaps, not as universal as Spacey might like to think. As one Maryland state delegate correctly noted, “We’re almost being held for ransom.”4 Indeed, as Szeliga, a consistent opponent of the film subsidies, said later, House of Cards’ ultimatum was the moment the downside of providing the show with subsidies should have been clear-cut to everyone. “Threatening to leave if you don’t get your money?” she said. “If everybody doesn’t see it in black and white today, they never will.”5
But even if it wasn’t the most sympathy-earning move, the show’s team had good reason to use this tactic: If there’s anything local lawmakers hate, it’s being blamed for job losses and accused of not doing enough to keep local people employed. Having Spacey deliver the message ensured that it gained media coverage, putting the potential departure of jobs directly in front of the public. TV stars from one of Netflix’s hottest shows were saying how much they loved working in and around the community and saying what a shame it would be if politics forced them to go somewhere else. Politicians, on the other hand, were trying to explain why what those stars were saying perhaps wasn’t true. A fair fight, this was not.
The ending of the episode wasn’t hard to predict: Resistance among the legislators crumbled and Maryland paid $11.5 million in film production tax credits and another $7.5 million in grants authorized by the state’s assembly, which the House of Cards crew graciously accepted. “We’re going to keep the thirty-seven hundred jobs and more than one hundred million dollars of economic activity and investment that House of Cards generates right here in Maryland,” O’Malley bragged.6
It’s no surprise the legislators ultimately caved, as Hollywood has gotten very, very good at wringing public dollars out of governments via these sorts of threats, and their attendant media campaigns, lobbying efforts, and even biased economic-impact studies. It’s all part of the blockbuster scam, the many and various ways in which taxpayers are being ripped off by the film and TV industry.
As of this writing, about three dozen states subsidize movie and TV production in some way via tax dollars. This largesse comes in several forms, but the most popular is simply a credit toward production costs: Prove you spent X dollars in this place, and you will receive a percentage of it back via what is essentially a check. Some states provide rebates as high as 40 percent. Various exemptions from other forms of taxation, including breaks on sales taxes or corporate income taxes, are also provided. As I’ll explain later, these credits can provide a windfall to companies that have no tax liability at all or even be sold off to third parties so that the buyers can reduce their taxes. The fancy language used to describe these credits shouldn’t obscure that we’re talking about cash that once belonged to the public and no longer does.
The theory behind providing film subsidies is simple and seductive: Give production companies and filmmakers money, and then jobs that would have gone elsewhere will instead be in your state or city, and they’ll be high-paying film industry jobs, too, with all the glitz and glamour that entails. These very visible jobs in the community—such as security guards, camera workers, or in construction—are usually accompanied by lots of newspaper articles about Hollywood A-listers coming to town, so it’s easy to see why politicians have tripped over themselves for the last several decades to provide the biggest and the best subsidy programs. As one budget analyst put it, “There’s an allure to policymakers, who get irrationally starstruck and like the idea of being at a production shoot with Ben Affleck or whoever.”7
Production companies, of course, love this. One director explained it like so in 2006: “Hey, you know what? Studio executives? They’d shoot a movie on Mars if they could get a twenty-five percent tax break.”8 The advent of digital filmmaking, which can make anywhere look like anywhere else, has helped the cause; shooting a movie about New York City doesn’t mean one has to be anywhere near the Big Apple. (A lot of movies set in American cities are shot in Vancouver or Toronto, thanks to Canada’s lucrative movie subsidies.) Studios have chased tax breaks around the country and beyond, leading to a massive proliferation of schemes in state after state after state, as nearly all of them have attempted to get in on the action.
The first explicit tax break for movie production was created in Louisiana in 1992, and a few other states started up small programs in the years after. But the golden age of the US film credit began in 2002, when the Bayou State initiated the Louisiana Motion Picture Investor Tax Credit program; after the number of productions in the state clearly increased, it set off a great race among the others to subsidize silver screen activity. By 2009, forty-four states and the District of Columbia had some sort of film incentive program on the books, as did the federal government. Only Delaware, Nebraska, New Hampshire, Nevada, North Dakota, and Vermont held out.9 The total cost of these programs in fiscal year 2010 was $1.5 billion.10
These dollars aren’t going to boosting independent films made by locals or to giving smaller production companies a leg up against Hollywood behemoths, which would perhaps have been defensible as an effort to build an industry from the ground up. Instead, it’s money going to Twentieth Century–Fox, Warner Bros., Disney, and DreamWorks, a veritable who’s who of the moviemaking elite, the corporate giants of the industry. In 2015, nearly every Academy Award Best Picture nominee, including the eventual winner, Birdman, received some public funding.11 Ditto in 2014, when American Sniper led the way in public largesse. “The name of the game, all over the country, is tax incentives,” said Lee Shapira, who works on sets and lighting in Maryland.12
But these programs don’t work as advertised. They often don’t come anywhere close to justifying their cost when it comes to economic activity, jobs, or sustainable development. States and cities have been buying precious little but some short-term glam and a long-term hole in their budgets.
Louisiana is an instructive place to start in trying to explain why these subsidies are almost always a waste but create the illusion that they do some tangible good. Undeniably, Louisiana’s tax credit program has convinced production companies to look at the state seriously when previously few did. In 2002, before Louisiana started doling out serious money to entice silver screen moguls, just one motion picture was filmed there. Five years later, the number had jumped to 54.13 In 2013, 107 projects qualified for public help, 49 of which were feature films, more than in any other state in the nation.14 Some of the biggest film franchises of the day—the likes of Terminator and Jurassic Park—called Louisiana home, as did some of TV’s biggest names, including NCIS: New Orleans and Duck Dynasty. Hollywood had moved, in a major way, from L.A. to LA.
The total cost of all this to Louisiana taxpayers was nearly $1.5 billion over the last decade. About $1 of every $6 spent subsidizing film production in the United States was spent by the Bayou State, as of 2015. And that’s where the trouble begins.
To start, it’s worth remembering that nearly every state in the United States—unlike the federal government—has a balanced-budget requirement; the states are constitutionally required to have outlays not exceed revenue. They can’t run a deficit or add debt via the annual or biennial budget. That requirement means every dollar dedicated to one thing is one less dollar for all the other responsibilities state governments have. Whereas the feds can argue that borrowing money to invest in a program is worthwhile, states often can’t, constrained as they are by legislative budget fiat. Thus, trade-offs are inherent in everything a state does, every fiscal decision it makes, every cent it decides to spend on one thing versus another, more so than they are on Capitol Hill in Washington.
So the first measure of whether a subsidy program is working is how much of a return it’s generating. And study after study, analysis after analysis, report after report, year after year after year, has shown how little money states recoup when they dole out funds for film production.
In Louisiana, one analysis found that the state received about $44.3 million in revenue—state and local taxes combined—in 2010 thanks to its film program, which cost nearly $200 million that year.15 A 2012 analysis found similar numbers: more than $200 million in outlays, about $50 million in revenue.16
The most oft-cited analysis of the state’s film program took place in 2005, conducted by its chief economist, Greg Albrecht. He found that the state only recouped about 16 percent to 18 percent of the cost of its film subsidies through tax revenue.17 He wrote that those numbers should be considered “generous,” as “a number of aspects of this particular analysis work to overestimate the likely true impact of the program.”
That’s not a great return, to put it mildly. And the same result has held across the country, consistently.
Maryland found that its film subsidy program recouped just six cents in revenue for every dollar spent. For Massachusetts, it was thirteen cents, New Mexico fourteen, and South Carolina nineteen. Few independent analyses have found a return that cracks thirty cents per dollar spent. Just two that I’ve seen—a study from New Jersey and an analysis from California—found the revenue even getting back half of what was initially spent.18 The dollars that went out the door were not coming back; in the strictest sense, these programs do not come close to “paying for themselves” in the popular governmental parlance.
So if that is the case, the next question is “What are these states paying for?” After all, it’s not necessarily bad for states to spend money on things that are worthwhile, even if the return on investment is less than 100 percent. Governments do that all the time, filling gaps that the private sector won’t or fulfilling other responsibilities that are unprofitable or prohibitively complicated for private entities but necessary for the public good. There’s not much profit in Medicaid or building roads, for instance, but few say we shouldn’t do such things. However, what film production programs are buying isn’t worth having most of the time.
The top-line justification is jobs. “This is a crown-jewel industry that provides jobs and opportunity for middle-class families in every region of our Golden State,” said one California state senator in support of upping such spending. “We’re sending a powerful signal today that we are one hundred percent committed to keeping the cameras rolling and bright lights shining in our state for years to come.”19 The same rhetoric is used everywhere else: Subsidize movies and get good jobs. It’s a simple equation on paper and one that makes for a nice sound bite. University of Southern California professor Michael Thom has found that rising unemployment is one of the most reliable predictors of whether a state will create a film tax credit.20 “Rising unemployment increased enactment likelihood, and falling unemployment increased termination likelihood,” he wrote.21
The simple “subsidies equals jobs” equation suffers from a few problems, however. First, by their very nature, these are temporary jobs. Even television shows that run for years aren’t filming all the time, while movie productions clearly have a limited time frame, even in an age in which it can feel as if every other film is part of some “franchise.” A Massachusetts study noted that “since all film productions are short-term,” employees on those projects end up “working from a few days to at most a few months.”22 A study by the Center for Economic Analysis at Michigan State University found that the “typical 2008 production filmed for 23 days” in that state, so it took 2,763 short-term positions to create the equivalent of just 250 full-time, yearlong jobs.23 This isn’t creating jobs so much as renting them for a few weeks at a time.
That dynamic is fairly evident at the anecdotal level. I lived in Baltimore when the early seasons of House of Cards were being filmed there. The production would come in, do its thing, and leave. Trailers and lights would proliferate for a few days, then vanish. By its very nature film work is not the sort of gig that local politicians should dream of building their economies around. (Yes, House of Cards did have a permanent set in the area, but that opened and closed with the production schedule, too.)
Szeliga, the state lawmaker, described a neighbor who works in trucking. He did get some work hauling materials to and from the movie sites, but inconsistently. “That’s not the same as a permanent Maryland job,” she said.24 This effect was even more apparent when it looked as if House of Cards might get canceled in the wake of Kevin Spacey’s sexual-assault scandal; positions associated with the show looked for all the world as if they would just disappear into the black hole that had become Spacey’s career. Headlines blared about the economic effect a cancellation would have on Baltimore, making the city yet another casualty of the Hollywood sexual-assault scourge. (Those same jobs will presumably also vanish when the show ends as planned after its sixth season, but everyone seemed less worried about that.) Film jobs come and go with popular sentiments of the TV-viewing public and the whims of financiers; structurally, no one can do a whole lot to change that.
The line of thinking at work here also assumes that the jobs created by film subsidies go to locals, helping people in the show’s filming location who wouldn’t have found employment otherwise. But that is often not the case. As economist Robert Tannenwald, who has done some of the most in-depth and critical work on film tax credits in the United States, explained in a 2010 paper, “Most locations in the United States (other than Los Angeles and New York City) lack ‘crew depth’—an ample supply of workers possessing the skills needed to make a feature-length movie. However, movie-making is so mobile that producers import their own scarce talent, such as principal actors, directors, cinematographers, and screen writers.… These non-resident ‘top personnel’ enjoy the best jobs and a large chunk of the income created by feature film production.”
Tannenwald said he became interested in film tax credits because “my boss asked me to look into it. It impressed me as just the sort of nightmarish subsidy that in the long run hurts the state more than it helps.” He found that “existing writing didn’t get to the heart of the problem” since the focus was on the benefits of film tax credits in the aggregate, without accounting for the downside. “People were not focusing on the full range of costs,” he said. “Those other measures [such as the film’s effect on GDP] capture benefits that redound to nonresidents, and those don’t really matter.”25
Benefits redounding to nonresidents is a recurring feature of film tax credits. In Massachusetts, for example, the state Department of Revenue found that while its film production credit created nearly two thousand jobs in 2012, only seven hundred went to residents of the state. In Georgia, producers of the Fox TV drama Red Band Society flew their own construction workers into Atlanta after not being able to find any.26 One worker I spoke to—Michael Davis, who worked on set construction for both House of Cards and Veep, another show that called Maryland home for a time—explained that he went to Michigan for temporary work after that state began its tax incentive program and started poaching productions, and that such moves were not out of the ordinary.27
Even if major movie studios pick up extras from the local population, they aren’t exactly putting local, struggling actors into their blockbuster films, so some portion of the public money inevitably goes to fund perks and pay for the actual millionaires who get cast by big studios. For instance, Missouri taxpayers helped subsidize the installation of satellite TV in Ben Affleck’s hotel room during the filming of 2014’s Gone Girl, as the Show-Me Institute’s Jessica Stearns found.28 Louisiana taxpayers covered actor Matt Dillon’s massages and local gym membership that same year during the making of Bad Country.29According to an Associated Press review, in 2009 about a quarter of the money spent by Massachusetts on its tax credit program went to pay the salaries of nonresident actors who made more than $1 million—so that year, $82 million in Massachusetts money was spent subsidizing nonlocal millionaires, while film companies spent just $42 million paying wages to local workers.30
This is a consistent problem with subsidies of all sorts and will come up again and again in this book: A nontrivial portion of the money leaks out to nonlocal workers, nonlocal companies, and even other countries, missing its target—and therefore the justification for it being spent in the first place—entirely. Local tax money, raised from the local tax base, gets spent to line pockets or generate economic activity somewhere else. Giant movie productions take their largesse and move it back to corporate headquarters, or offshore, or into the bank account of one of Hollywood’s biggest names, none of which does any good for the local worker trying to catch a break. By using a bank shot instead of directing payments straight into the communities they serve, lawmakers lose control over whether the funds benefit their constituents or instead go to foreign multinationals, foreign governments, or the richest of the global elite. A dollar paid out to a production company via a film tax credit may end up in an executive’s Swiss bank account or funneled through the Cayman Islands as part of some multinational’s tax evasion scheme. Control of local money simply goes “poof,” magicked away like something out of a Harry Potter film.
So that’s two problems already with the job-creation story boosters of these tax breaks tell: First, the jobs are temporary, and second, many of the best ones go to people not from the local area anyway, meaning the money leaks out of the community. Then there’s the simple cost per job: When talking film subsidies, it often gets outrageous. Michigan’s state Senate Fiscal Agency pegged the cost of that state’s film subsidy program at as high as $193,000 per directly created job.31 It would have been simpler to just hire four workers at $45,000 for a year and pocket the extra $13,000, instead of spending that all on just one job. While that’s the high end, it’s not an outlier. Massachusetts found that it was paying $108,000 per film production job.32 Other states have seen costs in the $60,000 range.
But even the statistics I’ve cited give movie subsidies more credit than they’re due. One of the main problems in assessing the effectiveness of not just film production subsidies, but most government-subsidy or job-creation schemes, is treating them as if they exist in a vacuum, as if all the people who benefit would have been sitting around doing nothing otherwise, twiddling their thumbs just waiting for some enterprising lawmaker to create a tax credit that would save them from the unemployment line. That’s not how it works. Some of the people who pick up jobs with various productions had other work before, so their new employment was not a job created; it was merely a job shifted. The tens of thousands, or even hundreds of thousands, of dollars that it cost to “create” that job were totally wasted.
William Luther, an adjunct scholar at the right-leaning Tax Foundation, explained it well: “A hairstylist might go from serving the public to crimping and curling on film sets. Earnings might be higher on the film set, and that’s a plus, but it’s one job shifted, not one just created,” he said. “If tax incentives merely allow those already employed to upgrade to a better job, the real gains from job creation are much lower than boosters suggest.”33 Indeed, that’s inefficiency at its finest. Missouri touted the success of its film program after the hiring of a few off-duty police officers to provide security on the set of Gone Girl.34 Couldn’t it have spent money on, well, hiring more cops or increasing the pay of the cops it currently had on the payroll, or hiring other public sector workers, rather than funding their extra pay through a movie subsidy that also spent money on a host of other non-security-related things?
Let’s expand the critique out a little bit because jobs are not the be-all, end-all measure of the effectiveness of government spending if that spending boosts economic growth in some other fashion. Film subsidy boosters bank on the “ripple effect”: It’s not just that the money creates jobs, but it helps other people who already have jobs—think the bars and restaurants patronized by the cast and crew, the local shops where set supplies are purchased, or the local drivers hired to ferry people around. Even if workers aren’t directly finding jobs with the production, all of that other stuff is helpful to the overall economy, right? “Whatever sacrifice we make in revenue on the tax credit, we more than make up for through the multiplier effect of economic development,” Georgia Governor Nathan Deal said in 2013.35
So do movies cause this “multiplier effect,” a critical idea in economic development that I’ll examine more later in the book? In the short term, maybe. In the long term, nope.
The temporary nature of film productions makes it unlikely that any lasting ripple effects occur. If any boost happens, it’s more akin to a sugar rush than anything sustainable. And that sugar rush comes at the expense of long-term investments that would build something with a more lasting impact or an industry that can eventually stand on its own without subsidization. The Maryland Department of Legislative Services in 2015 said that the state is worse off over the long run due to its film production credit than if it had none at all, because the investment is so short-term and the benefits so fleeting.
“The state essentially continues to pay for the credit after the production activity has ceased,” the department found, adding that several years out the state’s economy would actually be smaller—yes, smaller—because of the credit. In a backfire of epic proportions, the state’s film credit shrank the state’s GDP by millions of dollars; personal incomes over the long run were lower than they would otherwise have been, too.36 The state could instead have spent the money it plowed into film production on an investment in something that was self-sustaining or at least had benefits that didn’t disappear so quickly. But no.
That brings us to one of the great ironies of film production credits—and, again, to a larger problem with subsidy schemes writ large: The money often goes to subsidize activity that would have happened anyway.
As Darcy Rollins Saas, a policy analyst with the New England Public Policy Center at the Federal Reserve Bank of Boston, has pointed out, New England had plenty of film activity prior to the advent of its film subsidies, and “producers already filming in New England and planning to continue to do so will be able to avail themselves of film tax credits without having to expand their activity.” Sure, in places, such as Louisiana, that had next to no film industry before the subsidies kicked in, this argument doesn’t hold. But plenty of locales with other inherent advantages throw money at movies anyway to keep up with the Joneses or because they are afraid of losing what they have and bearing the subsequent bad press.
Saas calls these “tax windfalls” for movie firms and said that states need to be asking whether their tax credits are “inducing the economic activity desired or granting benefits for activity that would have happened anyway.” Oftentimes, it’s the latter.37
Perhaps nothing illustrates this more perfectly than the fact that California—California!—decided it needed to spend big on film subsidies despite its tons of advantages in attracting film production that other states can’t hope to match. In 2014, the Golden State concluded that the $100 million annually it was spending on film tax credits wasn’t enough, so it decided to more than triple its program. That’s $330 million to entice movies to the state that’s the home of Hollywood.
“This is a great day for Hollywood, for California,” said Governor Jerry Brown at the bill signing. “We will create thousands and tens of thousands of jobs.”38 Los Angeles Mayor Eric Garcetti agreed, “This legislation targets the heart and soul of this industry and our middle-class people who swing hammers, run cable, and serve food on set so they can pay the bills and spend money in our economy.”39
Productions have indeed fled California for other locales, which local lawmakers find distressing—the worst-case scenario for a politician is for jobs to depart on his or her watch, especially those in a core industry with a history such as moviemaking has in the Golden State. These jobs were not only moving overseas from California, but to places such as Louisiana and New Mexico. Elected officials understandably wanted to be seen as doing something about it; a politician who is seen as losing jobs for his constituents often loses his job himself.
But California is still California, and it’s always going to have advantages for filming that other states won’t, including a steady stream of talent that lives and moves there and a concentration of existing facilities. Subsidizing film production there is akin to New York City paying Wall Street banks to create jobs or Houston handing out tax rebates to oil companies for office expansions. The industry is already there. Paying for it is just a windfall for the companies involved.
Every dollar spent paying a company to do something film related is one less dollar to spend on everything else a state does. At least California’s budget was in okay shape when it tripled film subsidies. But that’s not always the case. Take, once again, Louisiana. Thanks in large part to the bungling and presidential ambitions of its then-Governor Bobby Jindal, by 2015 the state was facing a budget mess of epic proportions. Just about everything was on the table to be sliced and diced—except for film credits. Jindal initially claimed that changing the film subsidy program would amount to a tax increase, rendering it unacceptable. He was eventually persuaded to cap the program, limiting the amount doled out in any one year.40
But here’s the trade-off Louisiana was facing, as noted by Bloomberg News: “The state approves enough incentives each year to make up at least $200 million in proposed cuts that led Louisiana State University to say that it may plan for insolvency.”41 At the time, Duck Dynasty, the A&E reality show about bearded, ultraconservative makers of duck calls, was receiving $415,000 per episode from Louisiana.
Even the subsidy cap didn’t do all that much good. In 2016, Louisiana paid out its largest-ever subsidy to a single film: $38 million to the producer of Deepwater Horizon, a movie about the massive and tragic 2010 Gulf of Mexico oil spill. As Louisiana’s Advocate noted, that’s more money than the state spent on the University of New Orleans and the Southern University at New Orleans combined; it equals $8 for every single person in the state.42
These priorities matter for reasons other than efficacy. It’d be one thing if film subsidies were just a well-intentioned economic development idea that backfired. But in addition to being ineffective, they also hand precious state dollars—that could go to something such as education—to already well-off people and businesses. Adding insult to injury, the businesses benefiting may not even be the film companies that originally receive the subsidies, but other large, profitable corporations that don’t need help from the government.
Here’s how that happens: To start, to be eligible for subsidies film companies usually have to certify that they’ve spent money in a particular state. But they, crucially, do not need to have paid any amount in taxes, because film subsidies are almost always crafted as “refundable” tax credits, meaning the recipient can benefit from them even if he, she, or it owes nothing in tax payments. (The earned income tax credit—one of the federal government’s most effective and important antipoverty efforts—is refundable, meaning recipients can claim it even if they don’t have any federal income tax liability.)
This means that these subsidies are more akin to checks cut to the film production company by the government, rather than “tax breaks”—you can’t give a break on taxes that aren’t owed—though they are frequently portrayed as the latter when being debated by lawmakers. That framing also, as in the case of Jindal above, can prove advantageous when states reevaluate their programs. If the subsidies are a “tax break,” then eliminating them is a “tax increase” and thereby a tougher sell. And everyone falls into this rhetorical trap; I certainly haven’t gone out of my way to not call these subsidies “tax breaks” myself, even if it is a somewhat inaccurate characterization of what’s happening.
Not only are these credits often refundable, but many states also make them “transferable,” which is where more trouble starts. Rendering the credits transferable means they can be sold to other companies in the not-all-that-rare instance in which the company receiving them actually has no tax liability to be offset. More than a dozen states, to date, allow film companies to sell their tax credits in this manner, meaning an already-ineffective program then reduces the tax liability of a random smattering of other companies it was never meant to aid.
An entire industry has cropped up around helping the holders of film tax credits off-load them to other companies.43 In Massachusetts, to use one example, insurance companies and financial institutions have been the main beneficiaries of this transferability, not only reducing the tax liability of firms the legislature presumably had no interest in helping when it set out to subsidize film production, but also creating a bookkeeping nightmare for the state’s accountants, as these companies were holding on to their credits and cashing them in at a later date.44 Back in 2011, The Economist even noted that film credits have “become an industry unto themselves” thanks to their tradability, with their getting sliced and diced into tranches as if they were subprime mortgages before the 2008 financial crisis.45 Compounding this problem is that many movie productions are incorporated as individual limited liability corporations, not attached to their parent company in the legal sense, so they are able to drive down their tax rates to next to nothing, even if the parent company itself still has significant tax liabilities. The production then sells on its tax credits, banking the cash and sending it on to the parent company before the production corporation dissolves.
Other nations are not immune to the seduction of the blockbuster scam, either. Take Star Wars: The Force Awakens, one of the most successful box office draws of all time, with global earnings eclipsing $1 billion in 2016. A tiny detail of the film you’d be forgiven for overlooking is that George Osborne, then the United Kingdom’s chancellor of the exchequer, receives a line in the credits, as does Ed Vaizey, then minister of culture.46 But why would a British cabinet member—one who is celebrated or reviled depending on which side of the debate over fiscal austerity you’re on—be receiving that sort of thank-you? Because of his unwavering support of the United Kingdom’s film tax subsidy scheme, a tax break for movies and television shows produced in the country.
“These tax credits that support both film and TV production create around two billion pounds’ worth of business for Britain,” Osborne claims. “That’s many thousands of jobs and lots of different industries, not just acting but filmmaking and costume design and set design. All of those things are really brilliant jobs supported by this brilliant industry. It’s also a great advert for the country.”47
All told, Disney, the studio behind Star Wars after creator George Lucas sold the rights, received a bit more than 31 million pounds for The Force Awakens. (Films in the United Kingdom are eligible for up to a 25 percent rebate on their production costs once they’re officially categorized as a British production ex post facto.)48 Since 2007, when the United Kingdom’s current tax break was created, Disney has received some 170 million pounds ($250 million) from the country’s public pot, out of a program that dishes out nearly $240 million annually.49 As of this writing, the British film subsidy program has cost more than 1.5 billion pounds ($2.2 billion).50
Osborne and many in the British film industry may say this is money well spent, but the same dynamic that exists in the United States doesn’t get magically reengineered by a transatlantic voyage. Consider these numbers: Proponents of the UK credit claim that eliminating it would cause the country’s GDP to drop by 1.4 billion pounds ($2.2 billion) a year, which, taken at face value, sounds like a lot.51 But the United Kingdom has a nearly 2 trillion pound economy, so it’s a drop in the bucket.52 And nothing keeps that money on the Queen’s shores. As British director Matthew Vaughn has said, “We’re subsidizing Hollywood. We’re service providers. We’re not an industry.”53 Another director added, “While the tax break is good for Hollywood films shooting here, it’s probably not that great for British films shooting in the UK. Some middle-to-low-budget films are going to find themselves without crew because all the American films are shooting here.”54
For all my US bashing up to this point, it was Canada—and particularly British Columbia, its westernmost province—that made a big leap into subsidizing film production in the late 1990s, poaching thousands of US productions and bringing them north. At its apex, thanks to documents dumped as part of the 2014 hack of Sony Pictures, filmmakers in BC were having nearly 60 percent of their labor costs covered by the state.55 As Jordan Bateman, former British Columbia director of the Canadian Taxpayers Federation, said, “All told, the BC government cut checks for a billion and a half dollars in film subsidies over the past five years. That’s more than taxpayers spent on the ministries of aboriginal relations, agriculture, and environment—combined.”56 And as the Canadian dollar weakened, the cost of the subsidies increased.
Other countries around the world have joined the party, too. Australia provides film tax rebates of up to 40 percent, as does Colombia. It’s around 30 percent in Ireland, the United Arab Emirates, and Malaysia. France, South Africa, and the Czech Republic only offer 20 percent, by comparison.57
This brings up perhaps the biggest reason film subsidies don’t work: the opportunity for economic hostage taking. It’s not that hard for productions to cross borders to get a better deal, so companies and projects can easily play nations and US states off against one another.
At the top of this chapter, Netflix’s House of Cards used a threat to abandon Maryland as leverage to ensure that its flow of public dollars wouldn’t be stopped by the state legislature. Another show, though—HBO’s Veep, starring Julia Louis-Dreyfus as bumbling, incompetent, and extremely politically fortunate Vice President Selina Meyer—best illustrates the problem and consequences of subsidizing film production.
Over its first three seasons, Veep received nearly $14 million from Maryland to film there—evidently today’s networks regard the state as a good fill-in for Washington, DC. But then California came calling, offering more than $6.5 million if the show would relocate.58 And relocate it did, leaving Maryland high and dry. That $14 million left nothing permanent behind.
As Robert Travis Scott, president of the Public Affairs Research Council, a Louisiana-based good-governance organization, said, “The only way the movie tax credit program works is you have to keep paying them that incentive every year.… I think one of the movie promoters gave the best argument against this program when he said, ‘If you change or eliminate this program, we’ll all go to Georgia tomorrow.’ That, to me, speaks volumes.”59
Tannenwald has called the dynamic of states constantly needing to up their subsidies just to maintain the same level of economic activity “perpetual competitive purgatory.” “If they try to backpedal a little bit, even if the subsidies are generous, the companies say, ‘We’re out of here,’” said Tannenwald. “The states that are really serious about the competition can’t get out of it.”60
The Veep episode perfectly illustrates the problem with subsidizing such a transitory industry: Unless lawmakers agree to pay for it in perpetuity, and usually in ever-growing amounts, the state or city can be left with nothing. A severe case of diminishing returns is at work. In the case of Veep, Maryland paid for jobs for several years and wound up with no jobs; with House of Cards, the state paid more and more money each year for the same amount of jobs, under threat that the production would leave and the state would be stuck holding the bag.
This leverage works in other ways as well: For instance, the 2014 hack of Sony Pictures, likely undertaken by the North Korean government, revealed emails in which filmmakers agreed to a host of changes to Spectre—a James Bond film released in 2015—demanded by Mexican authorities in exchange for tax incentives, including casting decisions and changing the ethnicity of characters. “You have done a great job in getting us the Mexican incentive,” wrote Jonathan Glickman, one of the executives involved. “By all accounts we can still get the extra $6M by continuing to showcase the modern aspects of [Mexico City], and it sounds like we are well on our way based on your last scout. Let’s continue to pursue whatever avenues we have available to maximize this incentive.”61 The incentive money was so important that wholesale changes were made to the script to ensure it came in. And such requirements aren’t uncommon: While Spectre was an outlier in the scale of changes demanded, many locales require positive portrayals as a prerequisite to paying out their incentives.
But diminishing returns and a loss of artistic control aren’t even where the problems end. The later adopters of film subsidies also wound up paying a premium—and getting far less out of their money—than did the states or nations that piled in early. Consider Michigan: A later entrant into the film subsidy game, which it barreled into at the behest of then-Governor Jennifer Granholm, it didn’t create its tax credit until 2008, several years after other states had entered the business. So it had to play catch-up, doling out more generous credits than did earlier states to entice filmmakers from places in which they were already receiving a lucrative payoff—thus, as noted earlier, Michigan paid up to an astronomical $193,000 per direct job created.62 But as the Mackinac Center, a conservative think tank based in Michigan, has noted, between the film subsidy program’s inception in 2008 and 2014, the state actually lost film jobs. In 2013, zero full-time jobs were created in the film industry there. Not a one. Oops.
It’s worth noting at this point the odd politics at play when it comes to movie subsidies. They’ve been a decidedly bipartisan boondoggle, with both major political parties piling on at times in support. The subsidies are also scorned by economists on both sides of the aisle, for different reasons: Conservatives don’t want the state to pick winners and losers, preferring that money funneled to specific industries instead be used to lower taxes across the board. Liberals, meanwhile, don’t want the government spending money to subsidize already well-off corporate giants and note that the dollars spent on film subsidies could be used for a plethora of other public goods. The dynamic creates some strange bedfellows both in the analytical realm, where economists who agree on little else are in lockstep, and in the advocacy world, where right-wing antitax organizations work with left-wing social justice outfits toward dumping what they both view as wasteful, unfair, and ineffective programs.
Thus far, it might seem that no paperwork makes the case that film subsidies work as intended. But a healthy body of industry-funded literature actually claims large economic impacts, loads of job creation, and tons of ancillary effects for states and cities willing to pay up to have movies come in. A quick Google search turns up lots of this stuff. In just about every state where such a program exists, local economic development offices trumpet the findings of this genre of work, significantly muddying the waters regarding how effective film subsidies can be. The Motion Picture Association of America (MPAA)—the main lobbying arm of the film industry in the United States—has its fingerprints on a lot of this paperwork, whether it’s producing its own studies or funding others.
According to economists, studies finding a bonanza of benefits from film subsidies suffer from several flaws. First, they use a much bigger multiplier effect than do independent researchers, resulting in inflated benefits. One Maryland study claimed an economic impact of nearly $4 per $1 spent on movie production, the same amount Georgia boosters claimed. Economists say these estimates are way, way too high, and that the effect should be closer to $1.50 or $1.80 at the highest end. Those aren’t even the most absurd examples of huge effects being bandied about—one study in North Carolina claims that every dollar spent on film subsidies there results in economic benefits of $9, a number with which most economists would take real issue.63
Boosters also likely vastly overestimate the effect of “movie tourism” on state budgets. For instance, one study of New Mexico’s film subsidy found huge tourism effects in the state, based on a few surveys that most visitors there didn’t even bother to fill out.64 The tourism argument also falls apart once you remember that many of the locales are explicitly filling in as other, more expensive locations. Are those who watch House of Cards or Veep going to want to visit Baltimore, where the shows received their subsidy money, or Washington, DC, where they supposedly take place? How about when various locales are simply made to look like New York City? This argument assumes that the effects of movie productions happen in a vacuum, as if no tourists would visit these places in the absence of their being on the silver screen, an absurd notion when talking about, say, California, Louisiana (hi, New Orleans), or North Carolina. (Tannenwald does say that other locales need to study this more, as there may be a tourism effect that current studies haven’t picked up on.)65
At their low point, industry-funded studies resort to simple hand waving. One MPAA-funded study produced in 2012 by the accounting firm Ernst & Young didn’t even bother using a concrete example to bolster its cause in its “case study,” instead relying on calculations regarding a hypothetical $10 million production that produced more than double that amount in various economic benefits. “It’s as if the MPAA hired E&Y but then didn’t let them see any industry numbers,” snarked the liberal tax-policy organization Citizens for Tax Justice.66
As Joseph Henchman at the Tax Foundation wrote, “The MPAA is correct that subsidizing film production results in more film production, but they stop the analysis there. Good public policy means going further to determine whether those benefits are worth the costs, including a discussion of opportunity costs (alternative uses of resources).” It’s not enough to say that a movie production did some good. The argument has to be made that a dollar spent on film production is the best use of a state’s limited resources, outweighing all the other public goods that the money could have provided, including all of its other job-creation or economic-development efforts. Lawmakers should not be plowing dollars into inefficient economic efforts, even if they do have some benefits, given the myriad other options available.
There is some good news, though. In recent years a handful of states have decided that their film subsidies aren’t worth the cost. In 2015, New Jersey’s film credit program expired, and Governor Chris Christie vetoed an attempt to extend it the next year, arguing that it “offers a dubious return for the state in the form of jobs and economic impact.”67 (In 2011, New Jersey lawmakers were embarrassed to learn that MTV’s Jersey Shore, which was not the most flattering portrait of the Garden State ever committed to film, was receiving hundreds of thousands of dollars in taxpayer money.) As if to prove the point of those who said New Jersey would still be an attractive place for films even in the absence of a big tax break, other films, including Sully and Red Oaks, were still made in the state.68 Alas, Christie’s successor, Democrat Phil Murphy, signed a new $425 million film credit into law in 2018.
Other states have ended their programs and stuck to it, though, including Alaska and Michigan. “Michigan has much to offer the movie industry, including top-notch talent and beautiful backdrops that will continue to draw filmmakers to Michigan, even without taxpayer-funded incentives,” said Governor Rick Snyder when he signed a bill ending his state’s giveaway.
Still, some three dozen states maintain their film subsidies, and some large ones—such as California—are still boosting the totals they spend. In 2015, overall spending on movie subsidies reached $1.8 billion nationally.69
The ultimate insult to taxpayers is buried in a report issued in 2011 by the Congressional Research Service, the nonpartisan research arm of Congress. In an analysis requested by Oregon senator Ron Wyden, analysts found that in 1995, before film credits took off in the United States, the film industry made up about .4 percent of US gross domestic product. In 2010, when more than forty states were serving up money to entice filming within their borders, the film industry made up .4 percent of US gross domestic product. The service also pulled data from the US Bureau of Economic Analysis showing that film industry employment actually declined by about 18,000 between 1998 and 2010, falling from 392,000 to 374,000. So after billions plowed into subsidies in the name of job creation and economic development, the industry was employing fewer people than it had more than a decade earlier. Corporate profits in the film industry, though, were up.70 Jobs and economic activity may have shifted all over the country, but actual growth was nowhere to be found, while executives increased their payday.
The theory behind using the government to encourage economic development is that, eventually, the supports can be removed and an industry worth having can stand on its own. If the growth of film subsidies has shown anything, it’s that this doesn’t often happen. Instead, the industry in question gets subsidized in perpetuity, forcing the public to pay ever higher costs simply to maintain the level of economic activity it had before.
This gives producers all the leverage over lawmakers. And honestly, one can hardly blame production companies for chasing dollars, considering how eager governments are to throw money at them. The funds are there for the taking, so the companies would be irresponsible to not shop their wares looking for the best deal. At the end of the day, it’s not the responsibility of corporate America to ensure legislators are good stewards of public money, even if the companies’ tactics in pursuit of these funds are less than savory.
“It’s classic game theory, playing states against each other,” said Tannenwald. “If all the states just stopped giving tax credits, the film industry would film where it’s most economically efficient.”71
But this leaves state lawmakers stuck in a sort of prisoner’s dilemma: If they all held together against providing the film industry any more subsidies, everyone would be better off in the long run. But if only one state breaks ranks, providing some money, it reaps the short-term benefits at some other state’s expense and starts the cycle all over again. By the time the bill comes due, it’s going to be some other elected official’s problem.
To be clear, I don’t discount that cutting these programs will hurt some people. “Being employed is wonderful. Because of the programs, I’ve been steadily employed,” said Tiffany Zappulla, a Baltimore set decorator. She’s certainly not alone; she tells the tale of a colleague who half jokes that House of Cards put his kids through college.72 Change in public policy will almost inevitably produce winners and losers, and the losers in cutting film subsidy programs that already exist may not have a ton of options short of moving to more established film hubs.
But workers in the industry understand that a policy game is being played. “I wish the Canadians had never started this whole thing,” said Michael Davis, the set constructor. “What should we do? Unilaterally disarm? That just means a whole lot of people are out of work and have to move.”73
It’d certainly be nice if a simple solution were at hand, but unless Congress comes in with a national moratorium, there’s no magic-wand fix for the blockbuster scam. State legislators need to be made aware of what they’re buying when they toss money at film productions and not be swayed by short-term job creation, red carpets, industry-funded studies, or A-list actors descending on their cities singing the praises of spending public dollars on private moviemaking.
In House of Cards, Frank Underwood said, “There’s no better way to overpower a trickle of doubt than with a flood of naked truth.” In this case, it’s more like attempting to overpower a flood of nonsense and bad incentives with a separate flood of truth that often gets reduced to a trickle. That makes it difficult to prevent the Underwoods of the world—or whatever actor, producer, or company comes along next—from building the next House of Cards on the backs of the public.
“Look, if you believe the alternative is the government is going to turn around and throw the money in the river, then the film tax credit is better,” said Tannenwald. “I’m not that cynical.”74