Last week, before Louisiana governor Bobby Jindal declared himself a 2016 presidential candidate, the governor quietly signed legislation into law that caps state tax credits for film in the state at $180 million per year that will save the state $77 million annually — a wise move, given that the Louisiana government currently faces a $1.3 billion budget deficit. In response, Hollywood producers have threatened to take their film projects to states that offer larger film tax credits, such as Georgia.
Capping film tax credits is a new position for Governor Jindal. He has largely been supportive of tax credits, which were originally introduced in the state in 2002. Becoming a 2016 Republican presidential candidate may have given him a new view on special-interest tax credits and how they can threaten a state’s fiscal outlook.
While Louisiana is not as well known as Los Angeles for its film industry, New Orleans in recent years — since Louisiana’s generous tax credits were introduced in 2002 — has become a popular location for filming some of Hollywood’s highest budget films.
In fact, a recent report released by the film office of the City of Los Angeles found that Louisiana in 2013 overtook California to become the state where the highest number of studio movies were filmed. Of the 108 major-studio productions released into theaters that year, 18 were shot substantially in Louisiana, outpacing the 15 studio films shot in California.
The recently released blockbuster Jurassic World was filmed in Louisiana; it is expected to gross more than $1 billion worldwide and has a sequel in the making. The upcoming star-studded financial-crisis film The Big Short (in which I make a cameo appearance) was filmed in New Orleans.
Until now, there have been no limits on credits extended by the Louisiana Motion Picture Tax Incentive Act, which provides a 30 percent tax credit on all qualified motion-picture expenditures, with no project or program cap and a 5 percent credit for payroll expenditures on Louisiana residents.
Candidates in the 2016 Louisiana governor’s race are divided on the issue of film tax credits. Republican Jay Dardenne, currently the lieutenant governor, authored Louisiana’s generous tax-incentives program when he was a state senator, and he argues that the cap on film tax credits is too low and will damage the state’s production industry. His main rival, former GOP senator David Vitter, promises to maintain “a sustainable (versus completely unlimited)” program of film tax credits in the state, should he be elected governor.
Hollywood producers have threatened to move filming locations out of state in response to the new legislation. Lieutenant Governor Dardenne has suggested, according to his private conversations, that Disney/ABC studios have placed a moratorium on filming in Louisiana until the cap on tax credits is repealed. Some industry executives intend to move to Georgia, and many have already bought houses in Atlanta. Brad Pitt and Angelina Jolie, for instance, recently made headlines when they sold their New Orleans home.
#related#The Louisiana Film and Entertainment Association (LFEA) has announced its intention to sue the Louisiana government on “constitutional grounds,” claiming – in what looks likely to be an uphill battle — that film producers have a right to tax credits and corporate welfare.
Often such Hollywood industry groups will cite economic data to bolster their argument that tax credits create a large number of jobs. LFEA claims, for instance, that the tax credits sustain roughly 13,000 jobs in the state, as measured by the number of employees listed in the credits as cast and crew for each project filmed in Louisiana. However, this is a flawed economic argument that ignores much data about industry subsidies and labor-market distortions.
A 2013 study of Canadian tax credits, published by the University of Toronto Press, found that film subsidies are successful in achieving their stated objective of increasing employment in the film industry, but “the increase comes at the expense of economic activity and employment in other sectors.” The study uses a cost-benefit framework to demonstrate that Canadians are poorer, not richer, as a result of film tax credits. Other studies, including one by the Tax Foundation analyzing tax credits in Georgia, have produces similar findings on how film tax credits crowd out non-film employment.
As another example, the state of Michigan has spent more than $450 million on film tax credits since Democratic governor Jennifer Granholm introduced them in 2008, but there are fewer film jobs in the state today than when the tax credit program began, according to the Bureau of Labor Statistics. Governor Rick Snyder is expected to sign legislation that will end film tax credits in the state.
One benefit that liberal Hollywood producers probably underplay in their recent enthusiasm for filming in Georgia and Louisiana is the economic savings they receive from right-to-work laws.
While states such as Louisiana and Michigan are cutting back on their film tax credits, others are ignoring the associated economic costs. California has tripled its annual film tax-credit spending to $330 million, which is still outpaced by New York’s $420 million limit.
Tax credits aside, one benefit that liberal Hollywood producers probably underplay in their recent enthusiasm for filming in Georgia and Louisiana is the economic savings they receive from right-to-work laws in these states. As a result of these laws, the Screen Actors Guild has no say in these states over how many actors must be union-affiliated. Film producers therefore can hire more non-union employees, at a much lower cost — a significant economic incentive to choose locations in the Big Easy or the Deep South.
As states try to improve their fiscal outlook and credit ratings, film tax credits are something they can easily put on the chopping block without incurring a major economic setback. If more states would like to woo film producers at lower cost, they should pass right-to-work labor laws and lower their corporate tax rates. This would be a boon for all employers — not just Hollywood moguls — looking to bring business to their state.
— Jon Hartley is an economics contributor for Forbes and the co-founder of Real Time Macroeconomics LLC, a financial-technology firm.