Appeared in the Toronto Star on April 18, 2015 as Tax Credits for Film and TV Production a Race to the Bottom

The Nova Scotia government has been embroiled in a high profile controversy for the past week following its decision to slash tax credits available to film and television production in the province. The decision sparked an immediate backlash from the industry, which staged a major protest last Wednesday across from the legislature in Halifax.

While the government’s approach is certainly open to criticism – abruptly cutting the tax credits without warning may force the cancellation of long-planned productions this summer – the larger question of whether it should provide massive tax relief to the film and television industry is an important one. Eliminating or cutting the programs is politically difficult given the star power associated with film and television production, yet a growing number of studies have found that film and television tax credits do not deliver much bang for the buck.

The widespread use of film and television production tax subsidies dates back more than two decades as states and provinces used them to lure productions with the promise of new jobs and increased economic activity. The proliferation of subsidies and tax credits created a race to the bottom, where ever-increasing incentives were required to distinguish one province or state from the other.

In recent years, governments have begun to rethink the strategy. States such as Arizona, Michigan, New Mexico, and Iowa suspended or capped their programs. Louisiana found that it lost $170 million in tax revenue in a single year. In Canada, the Quebec government’s taxation review committee recently admitted that its provincial film production tax credit was not profitable and that numerous studies find that there is little economic spinoff activity.

But the most notable Canadian study on the issue has never been publicly released and is rarely discussed. The Ontario government’s Ministry of Finance conducted a detailed review of the issue in 2011, delivering a sharply negative verdict on the benefits associated with spending hundreds of millions of dollars each year in tax credits. It recommended eliminating a 25 per cent tax credit for foreign and non-certified domestic productions that would have saved $155 million per year.

A copy of the presentation to cabinet, obtained under the Freedom of Information Act, identifies at least four major problems with the provincial film and television tax credit approach.

First, rather than encouraging increased spending, government subsidies represent the majority of financing for film and television production. In 2010, tax credits, grants, and other public funding mechanisms subsidized approximately 60 per cent of all Ontario-based film and television production spending. Moreover, the corporations that claim tax credits pay no tax at all, with the total value of the tax credits being 6 times greater than the total tax income of domestic claimants.

Second, the sector is becoming more dependent on government support. In 1998, film tax credit expenditures constituted six per cent of production costs. Ten years later, there were fewer productions in Ontario, but the film tax credit expenditures were responsible for 30 per cent of the costs.

Third, the mounting government expenditures might be justified if it resulted in the creation of long-term high paying jobs. However, the Ontario government study found that film sector wages were below the provincial average and that many of those jobs were temporary, project-based ones.

Fourth, evidence suggests that other factors beyond tax incentives play a key role in determining the location of production activity. For example, the Ontario experience over the past two decades shows that foreign production is typically highest when the Canadian dollar is low relative to the U.S. dollar.

While the economic evidence to support film and television tax credits is weak, that does not mean that governments should not support the industry since the importance of culture extends beyond dollars and cents. Nova Scotia’s decision may be unpopular with some, but it is likely to be emulated by other governments as they assess how to support the film and television industry in a more economically responsible and effective manner.

Michael Geist holds the Canada Research Chair in Internet and E-commerce Law at the University of Ottawa, Faculty of Law. He can be reached at mgeist@uottawa.ca or online at www.michaelgeist.ca.