PPD Assignment 1

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School

University at Buffalo *

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101

Subject

Economics

Date

Jun 1, 2024

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docx

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Uploaded by MasterHeatJay41

Production in the entertainment industry can be very costly. These costs can include developmental, production, and administrative costs. Some regions decide to offer incentives that can lower these costs for the producers such as the California Film and TV Tax Credit Program which includes a tax credit for the production companies by up to 25%. Cities often subsidize the film industry in order to attract more attention and stimulate the local economy. More film production in their cities mean more jobs in film production and more customers for surrounding businesses. For example, employees or viewers will sit down at local restaurants and spend on local goods and other services. Even though a lot of the desirable jobs go to non-residents, the film industry still benefits the surrounding communities. More activity in local businesses mean more jobs and more industries wanting to move to the area. More business and film industry can also help to improve the brand of surrounding neighborhoods. Before the 1920s, New York and New Jersey were the main places known for film production. However, film makers were drawn to the cheap land and the year-round warm climate that California provided. California also provided an escape from the fees that Thomas Edison put on film making, due to the patents that he had put on his technology. In these western states, enforcement of these patents was more difficult due to limited technology and leniency of the law. In modern times, Hollywood has become very well recognized for film production and accounted for 7% of films produced in the United States. This is very important for the brand of the city as many people automatically think about movies when the name Hollywood is brought up. This creates a large tourist attraction and brings even more businesses to the area. The largest subsidies provided by the California state government were created from the Film and Television Tax Credit Program that began in 2015 and

were allocated by the category of movie produced. In 2015, the government gave out $330 million in tax credits to the film industry, 40 percent went to new TV shows, 35 percent to feature films, 20 percent to relocating TV series, and 5 percent to independent films. Tax credits are different from tax deductions in the sense that they directly lower the amount of tax owed, which tax deductions only reduce the amount of taxable income. This means that California is theoretically lowering its tax revenue by $330 million. However, it is not actually reducing the tax revenue by $330 million as many of the production companies benefitting from the tax credits would likely relocate anyway, which means no tax revenue from them at all. California already has the highest income tax in the country so the middle-class taxpayers are making up the difference for the tax credit. California also has the right to allocate any unused tax credits to areas that have higher demand at the time. California has also extended these tax credits to the construction of certain assets that are highly used by the film industry. Companies that spend at least $25 million on the construction of new soundstages, which are the warehouse-like buildings in which movies are filmed. This is important because Los Angeles reported a median occupancy rate of 98 percent for the film production studios. Providing increased incentive for the construction of new studios will create more supply and allow for more productions to move to Los Angeles. Over the lifetime of the Film and Television Tax Credit Program, there have been 169 productions that have benefited from the act. A study done by the Los Angeles County Economic Development Corporation found that for every dollar of the tax credit, economic activity will increase by $24, labor income will increase by $8, total GDP of the state will increase by $16, and the return on initial tax revenue will be $1.07. The 169

productions that were benefitted from this tax credit supported more than 100,000 jobs and $7.7 in wages. The film industry has been effective at obtaining subsidies because of increased competition of location in the film industry. Many production companies have moved to Los Angeles and New Jersey due to the tax credits but would also move from those places if the local economy could not provide enough incentive to stay. California wants to protect Hollywood and maintain the reputation that it has created for itself, so it has no choice but to try and keep up with other states’ incentives. Los Angeles does have other competitive advantages over other states such as the cluster of existing film production, but it must maintain this advantage in order to stay relevant in the future. Many elites that are associate with the film industry also lobby and use their personal connections to achieve their goals. Larger companies are also the ones who benefit the most from the tax credits as they generally can meet the financial criteria required to qualify. This makes it mutually beneficial as the film production companies prefer to stay in the same place and the state benefits from the economic stimulus as well. Many states recognize the benefits that the film industry can bring, and it is common for states to help fund entertainment such as films as it does help stimulate the local economy and brings lots of business to the area, like how a sports team would. As a result, the states with a lower market share of film production will provide incentives in the form of tax credits and tax deductibles. This forces the larger centers in the film industry to follow in order to remain competitive in the market. In many cases, film subsidies can be very costly and provide little benefits. In some cases, it can be very worth it for the city that partakes. For an already established center for

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