Tax Analysts Blog

What Is It About Hollywood?

Posted on Jan 9, 2013

The fiscal cliff debate is finally past us…at least for the moment, and there are very few winners. In fact, nearly every American will see a tax hike. So while there may be a general bemoaning of the “deal,” the film industry is among those celebrating.

Despite a red letter year at the box office, the fiscal cliff deal included a deduction for those that invest in movie productions or television shows shot in the U.S. Tucked into section 317 of the fiscal cliff legislation was an extension of IRC section 181, which permits investors to deduct the first $15 million of costs or $20 million if the production is shot in a low income area. To qualify for the deduction, 75 percent of labor costs must have been incurred in the U.S.

The deduction is very popular with investors because they can take the entire deduction in the first year (rather than spreading it over multiple years) and can combine it with state tax credits. Section 181 is particularly beneficial for television producers because the deduction applies to each episode of a series, to a maximum of 44 episodes.

According to an estimate from the Joint Committee on Taxation, the extension of the deduction could result in up to $430 million in deductions for the film industry over the next two years. Not bad.

Kate Bedingfield, spokesperson for The Motion Picture Association of America, said the film and TV industry has contributed significantly to the growth of the U.S. economy and that a “strong American film industry contributes to a strong American economy.” The inclusion of the deduction in the fiscal cliff deal seems to indicate Congress and the White House agree.

At the state level, however, the effectiveness of tax credits to the film industry is increasingly questioned. The Tax Foundation put out a report in 2011 which concludes:

      Film tax credits fail to live up to their promises to encourage economic growth overall and to raise tax revenue. States claim these incentives create jobs, but the jobs created are mostly temporary positions, often transplanted from other states. Furthermore, the competition among states transfers a large portion of potential gains to the movie industry, not to local businesses or state coffers.

Although the deduction provided by section 181 is markedly different than the tax credits provided to states, the film industry is doing well and showed remarkable resilience during the recent financial crisis. PwC reported total worldwide film industry revenue of $87 billion in 2010. That is an 88 percent increase from reported revenue in 1998. And yet, the film industry was rewarded in the fiscal cliff deal.

The likely reason for this is that the film industry has a strong lobby and contributed heavily to the Obama campaign. But I’ve always wondered if perhaps it is America’s fascination with Hollywood and the idea of having a movie in their backyard that prevents them from scowling when politicians give money away to a thriving industry, while those same Americans may struggle to make end’s meet.

Read Comments (1)

Peter MillerJan 10, 2013

Cara is right. The vast majority of Americans are star-struck. The populace is
therefore willing to ignore the merits of sensible - and fair - tax policy that
is not being applied to an industry that would thrive without the tax bennies.

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