Box Office Bombs: State Film Tax Credit Programs, New Jersey’s Included

Jilian McLeer
Monday, October 14, 2013

Scene I: State Film Tax Incentives

          Hollywood, Ca. – This iconic town has long been recognized as the center of showbiz, glitz and glamour, not only throughout the United States but also by countless other countries across the globe. Hollywood is quintessentially unique: with the Santa Monica mountains to the north, the famous Hollywood Sign in the Beverly Hills, and the historic backlot of Paramount Pictures, it is the perfect and most romantic setting for movie stars to be born. Those attached to the iconic town either through their dreams or in reality cherish this uniquely all-American cultural marvel.

          In recent decades, however, a phenomenon known as “runaway filming” has slowly begun to chip away at Hollywood’s historic monopoly on movie and television production. The United States is experiencing a mass migration of American feature filmmaking to foreign locations (particularly Canada and various European countries) in a widespread response to the foreign offerings of lower exchange rates and higher actor salaries, as well as generally lower production costs coupled with tax rebates for United States production companies. In response to these incentives, states including New Jersey have fought back with their own tax incentive programs to ensure the continuation of motion picture and television production within their jurisdictions.

          At the close of 2010, almost every state offered some level of competitive production incentives.[1]Throughout FY 2010, states committed approximately $1.5 billion to film and TV production subsidies.[2]Concededly, these programs have been successful in the sense that they help to retain near-respectable levels of film production within their respective states. Statistics reveal that in the long run, however, these state tax incentive programs are extremely expensive and essentially unsustainable policies. The most thorough study on the subject to date was conducted in 2008 by the Massachusetts Department of Revenue, which found that for every dollar of film tax credits awarded to film producers that year, the Commonwealth recouped only $0.15 in revenue.[3] The remaining $0.85 had to be financed by higher taxes elsewhere, or cuts in public services.[4] Studies of these film incentives conducted by other states estimate similar shortfalls, ranging from $0.72 to $0.93 per awarded subsidy dollar.[5]

Scene II: New Jersey’s Film Tax Credit

          New Jersey is no different. Governor Chris Christie suspended the state’s $15 million “New Jersey Film and Digital Media Tax Credit Program” in order to close an $10.5 million budget deficit in 2010.[6] Proposed legislation in 2011 called for reinstating the incentive and raising the film production credit program’s annual cap from $10 million to $50 million, and boosting the tax credit from 20% to 22% of eligible production expenses.[7] The tax incentive was ultimately reinstated.

          Importantly, though, a study conducted in 2010 by the New Jersey Institute of Technology (NJIT) for the New Jersey Economic Development Authority (EDA) that examined the program’s effectiveness  reported that the existing program was estimated to generate and maintain significant employment in New Jersey while “breaking even” on the program costs to the state.[8] It should be noted that the NJIT study’s conclusion that the program was “breaking even” was based on the position that the entire film industry in New Jersey was dependent on the film tax program, an unproven underlying assumption.[9] Additionally, the state’s Chief Economist, Dr. Charles Steindel, reviewed the study’s conclusion upon request and disagreed with the findings, instead concluding that the tax incentive provided little or no stimulus to state output or employment.[10]

          Based on the study’s findings, the factors cited by Dr. Steindel, EDA staff review of national studies, and the questionable returns that the program provides to taxpayers of New Jersey, the ultimate recommendation of the EDA was for the state to cease the continuation of the film tax credit program.[11]

Scene III: The Future of State and National Film Tax Incentives 

          State tax incentives for film production are not only harming the states, but also the country because they’re pitting the states against each another while the focus should be on creating a united, national incentive to keep filming stateside, and out of foreign countries. In 2010, Schuyler M. Moore, a partner in the corporate entertainment department at the Los Angeles office of the national law firm of Strook & Strook & Lavan, LLP, proposed a basic national incentive scheme: “It is time for all of the states to band together, stop the self-defeating madness, and request the federal government to convert [Title 26,] Section 181 [of the U.S. Code] into a useful 10% tax credit—instead of a deduction—for U.S. production costs.”[12]

          Indeed, the states should heed the wisdom of Mr. Moore’s position. The states must stop competing against one another by enacting their own individualized film tax incentive programs because they are just as harmful to the country’s economy as foreign film tax incentives. Instead, the federal government needs to create an effective national incentive to combat foreign film production and find a way to dissuade or preempt the creation of state film tax incentives so that American movie industry remains thriving in iconic Hollywood, California, where it belongs.



* Jilian McLeer is a May 2014 J.D. Candidate at Rutgers School of Law – Camden and a Staff Editor for the Rutgers Journal of Law & Public Policy.

[1] Adrian McDonald, Down the Rabbit Hole: The Madness of State Film Incentives as a “Solution” to Runaway Production, 14 U. PA. J. BUS. L. 85, 108 (2011).

[2] Robert Tannenwald, State Film Subsidies: Not Much Bang For Too Many Bucks, CTR. ON BUDGET AND POL’Y PRIORITIES (Dec. 9, 2010), http://www.cbpp.org/cms/?fa=view&id=3326.

[3] A Report on the Massachusetts Film Industry Tax Incentives, COM. OF MASS. DEP’T OF REVENUE 17 (Nov. 2011), http://www.mass.gov/dor/docs/dor/news/2011filmincentivereport.pdf.

[4] Id.

[5] Tannenwald, supra note 2.

[6] Michael Sieply, States Weigh Cuts in Hollywood Subsidies, N.Y. TIMES, Jan. 20, 2011, at B1; Melissa Hayes, State Sens. Weinberg, Sarlo Call for Restoration of Film Tax Credit Program, NORTHJERSEY.COM (Oct. 12, 2011, 7:03 PM), http://www.northjersey.com/news/State_Sens_Weinberg_Sarlo_urge_renewal_of_tax_credit_for_NJ_filmmaking.html.

[7] S. 3056, 214th Leg., 2d Sess. (N.J. 2011).

[8] Memorandum from Caren S. Franzini, Chief Exec. Officer, N.J. Econ. Dev. Auth., to Treasurer Andrew P. Sidamon-Eristoff, New Jersey Film and Digital Media Tax Credit Program 1 (Feb 17, 2011) [Franzini Memorandum], http://nj.gov/transparency/reports/pdf/NJ%20Film%20and%20Digital%20Media%20Tax%20Credit%20Program[1].pdf.

[9] Id. at 1-2.

[10] Id. at 2; see also Memorandum from Charles Steindel, Chief Economist, Dep’t of the Treasury, to Caren Franzini, Chief Exec. Officer, N.J. Econ. Dev. Auth. 1-5 (Feb. 4, 2011) [Steindel Memorandum] (Steindel Memorandum appended to Franzini Memorandum for submission to the Office of the Treasurer), http://nj.gov/transparency/reports/pdf/NJ%20Film%20and%20Digital%20Media%20Tax%20Credit%20Program[1].pdf.

[11] Franzini Memorandum, supra note 8, at 2.

[12] McDonald, supra note 1, at 160. Currently, section 181 permits a tax deduction of up to $15 million for domestic production costs. See 26 U.S.C. § 181 (2012). Tax deductions such as the aforementioned reduce one’s amount of taxable income by the amount of the allowable deduction, whereas a tax credit directly reduces one’s tax liability in the amount of the credit. Elizabeth Rosen, Tax Credits v. Tax Deductions, U.S. TAX CTR. (Aug. 28, 2013), http://www.irs.com/articles/tax-credits-vs-tax-deductions.