BLOG POSTS ARE PRELIMINARY MATERIALS CIRCULATED TO STIMULATE DISCUSSION AND CRITICAL COMMENT. THE VIEWS EXPRESSED ARE THOSE OF THE INDIVIDUAL AUTHORS. WHILE BLOG POSTS BENEFIT FROM ACTIVE UHERO DISCUSSION, THEY HAVE NOT UNDERGONE FORMAL ACADEMIC PEER REVIEW.
By Sumner La Croix and James Mak
In 1997, Hawaii was one of the first states to grant tax credits to attract content producers to film their projects in the state. As of January 2021, 32 states offer tax credits to defray qualifying expenses of filming movie/TV productions. The competition to attract film/TV productions now involves U.S. territories and many foreign countries. Over the years, film/TV/digital content tax credits (hereafter “film credit”) implemented by Hawaii and other jurisdictions have become increasingly generous. Recent studies on the economic impacts of state film credits have largely been critical of very generous film credits.
In a recent (March 15, 2021) UHERO brief, we reviewed Hawaii’s film credit to consider whether the film credit yields a favorable return to Hawaii’s residents. Act 89, SLH 2013 requires the Department of Business, Economic Development and Tourism (DBEDT) to conduct an annual cost-benefit analysis of Hawaii’s film credit. Since 2013, the State of Hawaii Film Office has issued annual reports on film/TV production spending eligible for the Hawaii film credit. The reports show that after the 2006 film credit was implemented, inflation-adjusted film production spending more than doubled between 2007 and 2019, growing at a far faster pace than the state’s economy thus contributing to the state’s goal of diversifying the Hawaii economy. Rapid growth of an industry receiving state subsidies is, however, far from unusual, and does not answer the question of whether the benefits derived by state residents from the film credit exceed its costs (in foregone opportunities) to Hawaii residents as tax revenues lost from granting film credits have alternative uses. We argued that a comprehensive analysis of the benefits from the film credit should (1) exclude out-of-state film/TV production related expenditures which qualify for Hawaii’s film credit; (2) account for the share of productions that would have occurred in Hawaii even if the state did not offer film incentives; and (3) account for increased exposure provided to potential visitors by films and TV series filmed in Hawaii.
Shortly after we posted our policy brief, DBEDT released a report, Cost-Benefit and Fiscal Impact Analysis of Hawaii’s Film Tax Credit in 2019. The report is informative, and uses a more detailed methodology than previous DBEDT reports to evaluate the film credit. DBEDT’s cost-benefit analysis considers a variety of different scenarios for evaluating the credit. One scenario assumes that in the absence of the film credit, all of the film/TV productions that received the credit would not have been filmed in Hawaii. An alternative (“redundancy”) assumption for calculating net benefits from the film credit is that a portion of film production expenditures would have occurred even without the film credit. DBEDT assumes the “redundant” portion is equal to the 10-year average of expenditures from 1987 to 1997 (adjusted for inflation) before the film tax credit was introduced in 1997.
In 2019, 39 film/TV productions incurred $311.2 million in production-related expenditures that were eligible for $65.4 million in Hawaii film tax credits. DBEDT’s calculations show that expenditures associated with each dollar of qualified film credit in 2019 increased the state’s gross domestic product (GDP) by between $2.51 and $3.92, and increased household income by between $1.58 and $2.44. DBEDT’s cost-benefit analysis also does not include estimates of how many tourists and their spending in Hawaii might have been influenced by exposure to films/TV programs made in Hawaii. That exclusion results in a downward bias of the benefit-cost estimate. DBEDT’s analysis also finds that the state treasury does not recover all of the tax revenue lost after distributing the tax credit. For each dollar of film credit distributed to film/TV producers, the state treasury was able to recover only between 36 cents and 50 cents in tax revenue from film/TV-related production spending. However, the economic rationale for offering a film tax credit is not based on whether they pay for themselves in the short run. Typically, they do not. The purpose of the film tax credit is to promote economic growth, a conclusion supported by DBEDT’s recent report.
Photo by Ryan Gobuty/Gensler and UH Academy of Creative Media.
3 thoughts on “The Hawaii Film Tax Credit: An Update”
Just a couple of comments:
First, DBEDT’s study does not provide a complete cost-benefit analysis of the film credit. The benefit should be measured as the effect on the economic welfare of the State’s residents; the effect on the State’s GDP is not an acceptable substitute. For example, suppose a proposed tax credit would increase the State’s GDP, but that the increase would result entirely from an inflow of immigrants, with no increase in average income of the original residents. Should residents support such a tax credit?
Secondly, DBEDT’s input-output (I/O) calculations don’t tell us the effect on the state’s GDP. The I/O calculations assume that the supplies of all inputs, including labor, are perfectly elastic. Thus, the I/O calculations assume, implicitly, that any increment in demand is met by an increase in supply, with no displacement of any existing production. It therefore overstates, often dramatically, the effect on output and employment of any new source of demand and provides a popular workhorse for advocacy research. In 2018 and 2019, the simple I/O calculations seem particularly inappropriate, especially if we are interested in employment and income of residents. because Hawaii probably had insufficient unemployment for proper functioning of its labor market.
A good general equilibrium model would remedy the problem but, unfortunately, is probably beyond the current state of art.
Two additional comments/questions that stood out:
– I get that DBEDT is a state agency, but only considering CIP spending as the opportunity cost of the credit seems pretty audacious. This implies that the next-best use of this money is state-directed CIP spending, which ignores public choice research and the state’s own history with infrastructure, airports, etc., no? Although, I suppose if this same IO framework is used to assess CIP spending, maybe state spending is nearly always net positive?
– I can’t help but questioning the credit’s probability of being determinative. DBEDT used inflation-adjusted historical spending as the alternative scenario, but this implies the credit is 70% determinative at the low-end. Economist Tim Bartik’s research on subsidies shows that this probability generally ranges from 2-25%, which seems more realistic given the natural resources that attract filming to the state. Applying the high of 25% reduces the GDP benefits to about $80 million even without correcting for issues within the IO framework used. Even without a full-blown GE model, incorporating other probabilities or some kind of stochastic method doesn’t seem like too much marginal effort, but I absolutely acknowledge that I may be wrong here.
Laron, you must be an economist. First, you cite Tim Bartik’s pretty specific research. Bartik might suggest that if 37 states now subsidize content production, it’s not really a private industry in any meaningful sense. Subsidies distort an efficient interstate spatial allocation of productive resources. (Bartik has suggested that such excesses may violate principles underlying the U.S. constitution’s interstate commerce clause.) Second, you question the odds that a Hawaii film production would occur sans tax credits and imply that DBEDT could have bootstrapped a probability distribution of those odds. Nice idea. Makes more sense than the arbitrary alternative calibration DBEDT chose. It’s never been persuasive that Magnum, PI and Hawaii Five-O would not have been filmed in Hawaii without subsidies. A twenty percent refundable production tax credit is what in the film industry (in EVERY industry) is called equity: producers have zero skin in the game, that’s why so many lame B movies are made in Hawaii. Worse yet, the state gets no equity, even though it literally provides the equity. Only Hawaii’s Ledge could figure out how to pay 20 percent of production cost and NOT get residuals. How many restaurants would be profitable if the state paid for the kitchen equipment? Third, forget CIP–I agree, that’s bogus. How about comparing “investment” in film with investments in early childhood cognitive and non-cognitive development? The latter have superior returns over other, physical or human, capital formation. Finally, DBEDT for an historical “benchmark” calibrated to 1987-96 as if the state back then did not subsidize the film industry. But the state built a sound stage for the industry back then, at Diamond Head. Magnum, P.I. could have paid its own way. Film tax credit apologists will say subsidies “caused” the Magnum, PI reboot; I say Hawaii should’ve been getting residuals all along, from all of the above.