The Problem

Witnessing explosions from the latest Transformers movie on Michigan Avenue and catching glimpses of movie stars like Johnny Depp and Angelina Jolie may provide an exciting novelty for Illinois residents. But is it worth the price?

Illinois state government offers film production projects generous tax incentives to film within its borders, but the state has never conducted a thorough cost-benefit analysis of the tax incentive program. How can taxpayers know if this program works as an economic development initiative if it never undergoes any type of performance review?

Beginning on January 1, 2004, the Film Production Services Tax Credit legislation created a tax incentive—called the “film production services tax credit”—meant to make Illinois “more competitive in site location decision-making for film productions.” Supposedly, “Illinois’ long-term development will benefit” from such productions. The incentive is available for films, television shows and commercial advertisements filmed in Illinois. It began as a tax credit of 25 percent of an accredited production’s qualified Illinois expenditures, plus an additional 10 percent of Illinois labor expenditures on employees from areas of high poverty or high unemployment, as determined by the Department of Commerce and Economic Opportunity (DCEO).

From 2006 to 2008, the state of Illinois gave out nearly $39 million in film production services tax credits. In 2009, the Illinois legislature made the incentive even more generous. The amount of the credit increased to 30 percent of qualified Illinois production spending and an additional 15 percent of labor costs for employees from high-poverty or high-unemployment areas. The tax credits are transferrable, meaning the credits can be sold to a third party if they exceed the project’s Illinois tax liability.

According to the Illinois Film Office, a division of the DCEO, “the goal of the Tax Credit Act is to attract local vendors, union leaders and filmmakers to the Illinois film industry in order to promote growth and job opportunities.” But what kind of jobs and growth is this tax credit supporting? Cornell University professor Susan Christopherson notes that the film industry “is a project-based industry.” Because of this, the jobs are often temporary. According to Professor Christopherson, “The problem is, this creates work, it doesn’t create jobs.”

Consider another important question about the “jobs created” by a film production tax incentive: Does short-term film production actually create jobs, or does it shift jobs around in the state economy? As the Tax Foundation points out, “a hairstylist might go from serving the public to crimping and curling on film sets.” So a job may be temporarily “created” in the film industry, but then one is also temporarily “lost” from another industry. Thus, the number of jobs “created” by these programs will be skewed. Data from the U.S. Bureau of Labor Statistics for various film industry occupations did not show a clear connection between job growth and the enactment of the tax credit. In fact, as graphic 2 illustrates, the number of actors in Illinois sharply declined between 2000 and 2009, while other film industry occupations experienced little to no growth.

It is also important to note that without the tax credits, some productions would still choose to film in Illinois. In a recent Chicago Tribune article, a producer of “Transformers 3” was described as saying “the film likely would have come here without the incentive because of the skyline, the architecture and the skilled crews here, among other factors.” Because some productions would film in Illinois without the tax break, only a portion of the jobs funded by productions can be attributed to the tax incentive. A comprehensive analysis of the program would help shed light on the marginal effect of the tax break on the film industry in Illinois.

Some supporters of film tax credits say the tax incentives end up paying for themselves because the extra taxes from the production projects inject money into the economy. Yet studies from other states do not support this position. A 2008 study of South Carolina’s film incentives program found it “returned 19 cents in taxes for each dollar paid out in rebates.” In Louisiana, the expected return for the state’s film tax incentive was 16-18 cents for each dollar paid out. Rhode Island fares a little better with “a 28-cent return on every dollar invested,” but Connecticut only gets eight cents. A recent report found that in Michigan, home of the country’s largest film tax credit, “even under the most optimistic assumptions, tax receipts driven by new economic activity barely offset 10% of the cost of awarding film tax credits.” Moreover, the private sector activity spurred by film production was estimated to be “well below their fiscal costs,” and the tax credit’s job creation effect was deemed “negligible.” Earlier this year, New Jersey governor, Chris Christie “suspended the film credit program on the grounds that the state could not afford to cut millions of dollars in checks to filmmakers while it grappled with a $10 billion budget gap.” After years of researching film-industry subsidies, Professor Christopherson concluded, “government investment in studios is almost always unwise, locking the public into production subsidies that mostly benefit huge—and distant—global corporations.”

Another argument for these tax-credit programs is that they offer discounted publicity for the state, drawing visitors and new residents. However, there are ways to achieve these goals without favoring one industry over another. Lower sales and hotel taxes would also generate tourism, and a more business-friendly environment across the board would draw new residents and entrepreneurs.

Our Solution

The popularity of film tax credits with politicians is undeniable. “The appeal of tax credits,” as a Forbes article explained, “is that they don’t look like the bald-faced subsidy that they, in fact, are.” Film productions also have the benefit of being very noticeable to the public. Focusing on this type of highly visible “economic development” is very tempting for politicians, especially in states that have broken tax and regulation systems. Private investment and entrepreneurs are currently fleeing Illinois, and rather than having superficial programs that help specific special interest groups, it would be more fair and beneficial to the state economy if tax and regulatory burdens were lessened across the board.

Film tax incentives have been popping up across the country in recent years. Currently over 40 states have some sort of film production incentive, causing a “race to the bottom” as states compete for production projects. Given the economic losses of other states’ film tax credit programs, a thorough and independent analysis of the Illinois Film Services Tax Credit program is long overdue. A comprehensive cost-benefit analysis will allow taxpayers and policy makers to judge how effective this program is in comparison to other economic development programs—and allow taxpayers to get the biggest bang for their buck. If it doesn’t meet clear cost-value goals, Illinois’s Film Production Services Tax Credit should be sunsetted immediately.

Why This Works

While the glitz and glamour of Hollywood and movie stars make film tax credits alluring, they may not be the most efficient economic development strategy. During a time of staggering unemployment in Illinois, job creation is on the mind of every state resident. In order to increase accountability and ensure the state is as effective as possible at maintaining an environment that promotes lasting job growth, initiatives such as the film production services tax credit need to be evaluated by independent reviewers to see if it lives up to its goals—and whether or not there is an even better use of valuable state resources.