Michigan report questions value of film tax breaks

Film tax incentive programs have been touted as a welcome revenue generator for state coffers. More than 40 states now offer such tax breaks to Hollywood filmmakers, siphoning off production from Southern California. Economically depressed Michigan boasts the most aggressive film tax incentive program in the country.

But a recent report from a fiscal agency that advises the Michigan Senate is raising pointed questions about the value of the program, claiming that more money is going out than coming in.

Since offering a film tax credit of up to 42% in 2008, Michigan has emerged as a favorite destination for Hollywood. The state has attracted more than 100 movie and TV productions, including “Transformers 3,� the horror spoof “Vamps� and the new ABC cops drama “Detroit 1-8-7.� Spending on film productions in the state has mushroomed to $224 million in 2009, up from $2 million in 2007, according to the Michigan Film Office.

But a report by the Senate Fiscal Agency, which evaluates state programs, has thrown cold water on the upbeat picture — renewing debate about whether film incentives are worth the cost to taxpayers.

The report found that the subsidies — which work like a rebate toward qualified production expenses — generate roughly 10 cents in new tax revenue for each dollar paid to filmmakers. In 2009, for example, the state spent $68.7 million on film tax credits but generated only $7.5 million in tax revenue from the film production activity, leaving the state with a net loss of $61.2 million.

The study concluded that nearly half of the expenditures that qualified for the state’s media production credit did not affect the Michigan economy, mainly because they were made to individuals and firms outside of the state. In addition, the state agency disputed as unverifiable job creation claims touted by the state’s Film Office.

“Any probable impact from the film incentives is likely to have a negligible impact on economic activity in Michigan,� the report concluded in its sobering tone.

Carrie Jones, Michigan’s Film Office director, has countered that it’s too early to evaluate the program and says it is “misleading� to measure the program based on tax revenue alone, citing the positive effect on jobs and small businesses that serve the industry.

“The program provides benefits for Michigan that the numbers alone don’t account for but are critical to understanding the overall impact on the state,� Jones said. “It is reigniting our entrepreneurial spirit, providing hope and excitement in our communities and reshaping Michigan’s image.�

The Senate report is certain to become political fodder in Michigan. Among the staunch supporters of film tax breaks is Gov. Jennifer Granholm, a Democrat, who views the film industry as a growth driver for an economy ravaged by recession, high unemployment and the travails of the U.S. auto industry. Republican gubernatorial candidate Rick Snyder, however, has questioned the financial viability of the tax breaks in light of the state’s budget crisis.

For now, film and TV activity in the state shows no sign of letting up. Producers are expected to spend at least $300 million more in Michigan this year. Several new production facilities are sprouting across the state, including a $76-million studio that Los Angeles-based Raleigh Studios is building in Pontiac.

Despite the severe recession, most states have kept their film tax incentive programs intact. Some states, such as New York and Florida, have even expanded them. Still, as the Michigan study attests, such programs are drawing more scrutiny as states grapple with massive budget deficits — and in some cases scandal.

Iowa Gov. Chet Culver has called for scrapping the state’s film program after a criminal investigation over the misuse of tax credits. In Michigan, the state has charged a developer of a proposed studio called Hangar42 of seeking to fraudulently obtain $10 million in tax credits.

Jones declined to comment on the case but said production expenses were closely audited. “We were able to weed out any wrongdoing before any state dollars were expended,� she said.

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