Audit highly critical of Georgia’s film tax credit still overstates its impact

An exhibit from the official audit of the administration of the Georgia Film Tax Credit

A funny thing about the audit on the economic impact of Georgia’s film tax credit — the one that found that Georgia was losing 90 cents per dollar of tax credit awarded. The audit provides a much lower economic impact of Georgia’s film tax credit than the Georgia Film, Music and Digital Entertainment Office does. But because of certain assumptions used in its model, the audit still manages to overestimate Georgia’s film incentives’ impact.

This blog post will talk about one of those assumptions. My next blog post will discuss another one.

A fundamental flaw

The Georgia Film office had people believing that the film incentive was bringing in $7 billion in 2016. That’s the same year studied by the audit, which estimated a smaller economic impact of $4.6 billion before accounting for lost alternative government use of tax revenue. The audit estimated a net economic impact of $2.8 billion, which is just 40 percent of the estimates from the Film Office.

But the audit makes the most fundamental of mistakes in gauging the economic impact of a state giveaway — it assumes that there’d be no economic activity in the sector at all without it:

For all aspects of the analysis – production companies, studio construction, and film tourism, we assumed all economic activity resulted from the film tax credit, meaning none would have occurred without it. … If some of the economic activity would have occurred in the state without the credit, the credit’s economic impact would be lower than estimated in this report.

Economic research is highly doubtful that targeted tax credits, including film incentives, drive economic decisions to locate in a particular state. There are too many factors at play than access to incentives. They can play a role for marginal location decisions, but for all economic activity? No.

So the answer for the economic impact of Georgia’s film tax credit in 2016 isn’t $7 billion, $4.6 billion, or even $2.8 billion. It has to be a fraction of $2.8 billion.

If you just want to boost the industry, a modest incentive is the trick

Interestingly, for those rare instances when a tax credit to incentivize film productions could have a decisive marginal change for a production company to choose the state, research finds the incentive level has to be kept low. Otherwise it will be taken advantage of by too many companies that would otherwise already choose to film there.

The key to understanding this distinction: an incentive isn’t working to incentivize something that was going to happen regardless. An “incentive” that pays a company to do something they were going to do anyway is simply a wealth transfer — and it doesn’t have any net positive effect on the state’s economy.

Research in 2018 from Kennesaw State University (Georgia) economist John Charles Bradbury found that film incentives help film production companies but that there was “little evidence” they boost the state’s economy.

Bradbury then considered the question of what would be the best level of incentives if the policy goal wasn’t to boost the state’s economy, but rather to boost the movie production industry in the state. His answer? No greater than 10 percent:

Film credits of ten-percent or greater are associated with increased film industry growth; however, raising the credit to a higher level is not associated with further industry growth. States that seek to subsidize the film industry to boost its in-state presence for non-economic reasons—perhaps state residents receive non-pecuniary benefits from having movie stars travel to the state—can attain those benefits with lower levels of tax credits. The estimates indicate that extending the credit to higher levels is not associated further the growth of the film production. …

If greater tax credits do not encourage further film production, then they represent an increased transfer to film producers without any corresponding benefit from increased economic activity.

Incidentally, Bradbury’s 2019 study of Georgia’s film incentives found that “commonly reported estimates of the film industry’s impact on Georgia’s economy are grossly overstated” and that Georgia’s “return on investment appears to be quite small, indicating that resources devoted to the tax credits may have superior alternative uses.”