Subsidies stop for Michigan’s film industry

On July 10, 2015, Michigan was officially out of the business of handing out film subsidies. A bill supported by nearly every Republican in the House and Senate (and joined by one Democratic House member) prevents the state film office from handing out any new incentives.

This is quite a turnaround for the state.

In 2008, in the midst of Michigan’s “Lost Decade,” legislators voted 145-1 across both chambers to send a bill establishing a film subsidy program to Gov. Jennifer Granholm. Only Sen. Nancy Cassis (R-Novi) resisted Hollywood’s allure. Granholm, a huge promoter of the incentives, enthusiastically signed the most generous film subsidy program in the nation.

“This program is designed to attract studio lots and production houses that will be employing people and growing an industry to support the short-term filming that happens on location,” Granholm said in a news release announcing the signing. “We’ve seen the excitement that is generated when a movie is filmed on location. … We want to turn that excitement into jobs.”

It didn’t turn out that way — at all. Instead, politicians’ excitement turned into no permanent jobs, special favors for politically connected big players, the raiding of funds from necessary government services and 475 million wasted taxpayers’ dollars.

Initially, the state’s program granted a refundable tax credit (essentially a subsidy) of up to 42 percent of a film’s cost. Over the life of the program, the vast majority of this money went to out-of-state production companies. For the first three fiscal years, with no legislative cap on spending, the Michigan Film Office was spending over $100 million per year on the program.

As measured by the federal Bureau of Labor Statistics, the state had 1,663 direct film jobs in 2008 and 1,561 in 2014. While there was a small uptick in film jobs in Michigan for a brief moment over this period, these jobs didn’t last.

That’s been the typical story nationally — Hollywood production companies play states off each other to garner the best deal possible. In other states, when lawmakers want to eliminate or even cut back on incentives, powerful special interest groups representing production companies threaten to avoid the state altogether.

The Mackinac Center has long questioned all special tax credit and subsidy programs, but filmmaking is an especially transient industry. For that reason, many scholars consider state subsidies of the industry to be one of the worst uses of public funds. Our research shows the Michigan program to have high costs and few gains. The Senate Fiscal Agency found in 2011 that the state spent $125 million for a return of about $13.5 million — meaning taxpayers got back 11 cents on the dollar.

Nationally, experts across the ideological spectrum agree. The fiscally conservative Tax Foundation notes that movie production credits result in “small returns and take unnecessary risks with taxpayer dollars.”

The Center on Budget and Policy Priorities is a left-leaning think tank. Robert Tannewald, a professor at Brandeis University and former economist and officer at the Federal Reserve Bank of Boston, wrote a 2010 study for the CBPP which reports:

“Like a Hollywood fantasy, claims that tax subsidies for film and TV productions — which nearly every state has adopted in recent years — are cost-effective tools of job and income creation are more fiction than fact. In the harsh light of reality, film subsidies offer little bang for the buck.”

In addition to the poor return on taxpayer investment, Michigan’s film subsidy program encouraged bad behavior. At least three major movie studios were launched and failed. For instance, Hangar 42 in Walker barely got off the ground before faltering amid felony charges and fraud allegations against the developers of the property. The Mackinac Center broke the story leading to the studio being shut down.

Unity Studios in Allen Park received tens of millions of taxpayer dollars — a combination of local and state funding — and promised thousands of jobs. But the middle-class suburb of Detroit nearly went bankrupt after the studio failed. An emergency financial manager had to clean up the mess, resulting in major cuts to city services.

The Pontiac-based company Michigan Motion Picture Studios entered into a special deal with former Gov. Granholm putting the state pension systems on the hook if it missed bond payments. When the studio flopped, the state’s pension funds for state workers and public school employees were raided to pay off the studio’s creditors.

Despite these disasters, Michigan’s film incentive program did lead to some economic development. If the government pumps enough money into any industry, there are bound to be some economic effects. But the question remains: Is subsidizing one politically favored industry a good use of taxpayer’s money? The state could, for example, successfully attract new investments in agriculture by subsidizing the growing of oranges on Belle Isle. Michigan’s orange industry would certainly grow, but wouldn’t it be better to leave that business to farmers in Florida and California?

To evaluate the real economic effects of any government program one must consider both, in the words of the 19th-century French political theorist Frederic Bastiat, “what is seen and what is not seen.” In other words, any positive economic effects resulting from giving $475 million to the film industry must be weighed against the effects of that same money being spent on different government programs or being spent or invested by taxpayers themselves.

In the end, politicians’ hopes of using the film subsidy money on a different government program may have been what finally killed Michigan’s film program.

Michigan’s May 2015 ballot proposal, Proposal 1, would have hiked taxes $2 billion in order to generate $1.2 billion more in funds for roads. It suffered a historic loss — 80 percent of voters rejected it. Reeling from this, legislators were forced to look elsewhere for road funding, and the $50 million per-year film program was low-hanging fruit.

Abiding by our free market principles, the Mackinac Center fought the film incentive program from the beginning. In an article titled “Legislators’ Hollywood Dreams Defy Economic Reality” and written shortly before the program was created, policy analysts Jack McHugh and James Hohman wrote:

“Like all such targeted subsidy and tax break programs, the main purpose of the film handouts will be to give the appearance of ‘doing something’ while legislators avoid the heavy lifting of passing the broad-based tax, regulatory and labor law reform that would genuinely fix our broken economy. If they were less star-struck, legislators would finally begin the transformational restructuring and downsizing of government needed to make possible lower taxes for all job providers — not just those who hire movie stars.”

Even as the credits roll on the film program, this lesson is still relevant. It is not glitzy, big-government programs that lead to true prosperity. Real economic development is spurred by the millions of decisions and negotiations by private individuals, who risk their capital in hope of future gains. Encouraging more of this activity means less government involvement in the free enterprise system.

Jarrett Skorup is digital engagement manager and policy analyst for the Mackinac Center for Public Policy in Midland.

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