Editor’s Note: A 2011 study on the state’s film credit program intended to keep production in California was sponsored by the Los Angeles County Economic Development Corporation (LAEDC). With the legislature considering an extension of the credit, a February 2012 study by the UCLA Institute for Research on Labor and Employment analyzed the LAEDC study. The Legislative Analyst commented on the results of the analysis and the original study in a letter to Senator Lois Wolk, Chair of the Senate Governance and Finance Committee that is considering the film credit extension. In response to the LAO letter, the co-author of the original LAEDC study wrote the following letter to take on the issues raised by the LAO.
June 25, 2012
California Legislative Analyst Office
Dear Mr. Taylor,
In response to your June 13th letter to Senator Wolk, Chair of the Senate Governance and Finance Committee, evaluating the 2011 Los Angeles County Economic Development Corporation (LAEDC) study, which I co-authored, on the economic impact of California’s film and television tax credit program, please allow me to address your comments one at a time directly below.
First and foremost, the LAEDC absolutely stands by the methodologies, results and objectivity of the aforementioned film and television tax credit study, in which we were asked to assess the state’s return from the film and television tax credit program by estimating the economic activity and tax revenues generated by a selected sample of nine production budgets that have earned credits under the California program.
Second, it is true we chose not to net out potential benefits or costs (“opportunity costs”) of alternative uses of the tax credit funds for other programs. In today’s environment of severe budgetary shortfalls, we very reasonably assumed that the most likely use of such funds would be to offset budget deficits (i.e., the funds would actually not be otherwise deployed). This is certainly a realistic assumption, and is a use of funds which would have limited employment impacts during the window of our analysis.
Third, looking back at what actually occurred, it is true a few “waitlisted productions” ultimately filmed in California without having received the credit. This was not an intentional oversight, but a reasonable assumption on our part since our study examined the tax credit program before the productions had been undertaken, audited and approved for final allocation. More important, however, is the fact that a number of these waitlisted productions (that applied for credits and did not receive them, but still nonetheless proceeded with production in California anyway) were smaller productions, which – as we show in our report – are not nearly as valuable in terms of generating economic impacts (and consequent fiscal return), especially when compared to those productions that ultimately left California. Indeed, your letter emphasizes and confirms this point as well, both referencing the UCLA Institute for Research on Labor and Employment (UCLA-IRLE) study, which noted all of the waitlisted productions filmed in California were independent films that are likely to have smaller budgets than other productions, and further offering that “in the event that future studies consider these issues, it will be interesting to see if this trend continues.” Point being, the productions with the biggest budgets and the most profound job and fiscal impacts, also have the most flexibility to stay or go, and thus will in all likelihood be the ones leaving California “but for” the film tax credit.
Fourth, you suggest the possibility that productions receiving tax credits are competing with other (non-qualifying) productions for talent, services or other inputs and thus causing so-called “crowding out” effects that occur when a production encouraged by the credit program to remain in California uses available staff and industry infrastructure that then are not available for use by other productions. These “crowding out” effects, you say: “could defer, reduce, or eliminate altogether the opportunity for those other productions to film here in California.” Though theoretically sound, this is unconvincing on a real-world, real-time and practical level. With approximately two million Californians still out of work, almost 25 percent of them located here in Los Angeles County alone, you will be hard pressed to find that competition for resources is a reason for production shortfalls. In addition to numerous physical production facilities which we know are not overburdened with activity, the Los Angeles region provides an almost limitless supply of “on location” filming options. Consequently, your suspicion “that in some years the crowding out effect would be close to zero” would likely be much closer to reality.
Fifth, it may be technically accurate to claim that when a production is done outside California, some economic activity continues to be generated here. But this economic activity would be short-lived going forward and negligible – at best – when one considers what’s at-stake should we continue to lose increasingly more of California’s deep-rooted film and television production industry to other regions. Remember, of course, that this industry weaves itself through a myriad supporting industries, including construction, food preparation, accommodation, truck transportation, equipment rental, maintenance, professional and technical services, graphic design, personal services such as cosmetics, wardrobe, parking services, laundry, legal services and accounting, in addition to many layers of talent, writers, producers, cameramen and others. This means that the production industry is able to find suppliers for more than 90 percent of its needs in the state. Yes, a number of other states are not so fortunate and may have to import services from California (and many states are pursuing the development of their own industries by offering credits for infrastructure building in order to hasten the development of local supply and obviate importation), but as these states’ industries grow, any reliance on California talent or services will wane, not increase. Hence, each production that is lured away by competing tax credits is a seed that will land and germinate elsewhere, thereby reducing – not augmenting – the net economic benefits generated here.
Sixth, your assertion that film-related tourism related to the credit is “not significant” is simply false. The LAEDC decided not to include film-related tourism in its study because our analysis was limited to assessing the impacts of qualifying productions only. Even so, we are quite aware of and confident about the importance and value of this industry on tourism. Millions of visitors from around the world come to Southern California to experience Hollywood, Universal Studios, the Walk of Fame, Mann’s Chinese Theatre and our many other film-related attractions. They come to movie premiers, to filming events and to visit the homes of famous movie and television stars, producers and writers. Anyone who has traveled abroad can attest that in the farthest reaches of the world, even in some of the world’s most remote destinations, they have heard about and dream of visiting “Hollywood.” These visitors – again, millions of them annually – purchase hotels rooms, food, services, clothing, jewelry, perfumes, sightseeing trips, air travel, vehicles, entertainment experiences and more—all motivated to come by our motion picture and television industry. All these expenditures generate significant revenues at all levels of government. The escalating and quickening loss of this industry in California to other regions offering film and television tax credits threatens this valuable (film tourism-driven) revenue stream. To claim otherwise is just factually incorrect.
Finally, on this key issue of fiscal impacts, we are happy to see that the LAEDC, UCLA-IRLE, and two Milken Institute studies confirm the finding that the California film and television tax credit program has a net positive fiscal impact. While our net positive fiscal impact may vary by a few pennies – for example, $1.04 versus $1.13 for the UCLA-IRLE and LAEDC studies, respectively, we all agree that runaway production is a big problem for California and that states like Louisiana and New York are setting production records at our economy’s expense.
Christine Cooper, Ph.D.
Vice President, Economic & Policy Analysis Group
cc: Senator Lois Wolk, Chair, California State Senate Committee on Governance and Finance
Members of the California State Senate Committee on Governance and Finance