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Critique Questions Film Incentive Impact

A study regularly cited by supporters of New Mexico's film industry incentives as proof the tax breaks more than pay for themselves may have significantly overstated the revenue they generate, a policy analyst with the Federal Reserve Bank of Boston says.

The analyst also says the cost to New Mexico taxpayers for each film job created here is more than 20 times the amount estimated in the 2009 economic impact study by Ernst & Young.

The critique by Jennifer Weiner of the Federal Reserve Bank of Boston New England Public Policy Center is one of dozens of film incentive studies circulating in the Roundhouse while lawmakers consider a Senate bill that would cap the amount of money the state will provide filmmakers, said Lisa Strout, New Mexico Film Office director.

The Ernst & Young report issued in January 2009 found that each dollar of incentive generated a total of $1.50 in revenue — 94 cents in state economic activity and 56 cents in local activity.

But Weiner argued in an April 2009 memorandum that the study could overstate capital investment by the film industry, spending in New Mexico by highly paid people who live out of state, and the impact of filmmaking on tourism.

She estimated state level revenue is 39 cents — compared with the estimate of 94 cents by Ernst & Young — for every dollar of incentives. She did not evaluate local revenue.

Ernst & Young found New Mexico taxpayers spend $307 for each film industry job created. Weiner said the cost of each job is $7,543.

Ernst & Young was commissioned by the Richardson administration and paid $50,000 for its work.

Weiner, who studies public incentives for economic development, had concluded in January 2009 that film industry incentives in Connecticut did not pay for themselves.

She wrote in an April 2009 memo to Connecticut's Voices for Children that she wanted to understand why Ernst & Young concluded incentives offered by New Mexico and New York did pay for themselves. Connecticut is a state in the Boston Federal Reserve Bank's district.

Weiner's memo says her evaluation does not necessarily reflect the view of the Boston bank or of the Federal Reserve System.

"We will stick by Ernst & Young," Strout told the Journal in an interview Monday.

Strout said Ernst & Young spent eight months creating a model of the state's economy and gathering data about the film industry. "Ernst & Young were very tough. They said if they could not get the data (to support an analysis) they would leave it out."

Strout said her office saw Weiner's memo when it was first published, agreed with some of its findings and felt she raised important policy questions.

Weiner found:

• Ernst & Young assumed all film activity came to New Mexico as a result of the incentives, though some projects may have come here without them. Strout said the film office is convinced virtually all recent film activity is a result of incentives because the state's record of attracting filmmakers before the incentives was so spotty.

• The study did not account for New Mexico's requirement that its state budget balance. Therefore, taxes lost to the film industry have to be made up somehow, which would tend to depress economic activity elsewhere.

• Study findings that increased tourism accounts for between 25 percent and 40 percent of the incentives' economic impact are "difficult, if not impossible" to verify. Strout said data such as these were gathered through direct contact with businesses and local governments.

• Ernst & Young probably overstates the impact of industry capital expenditure. The study looked at activity in 2007 when Albuquerque Studios was being built. Weiner said a project of that size is not likely to be repeated and the revenue-generating impact of construction projects is short-lived.

• The study appears to include the impact of spending in New Mexico by directors, producers and actors who make large salaries on a New Mexico-based film but who don't spend much money here because they live elsewhere. Strout said Ernst & Young used only spending data that it could verify were accurate.

The state provides a 25 percent refundable credit on most taxable expenditures film companies make in the state. Most of the credit to date has been applied against corporate income tax liability, according to the Legislative Finance Committee, the legislature's budget analysis arm.

Senate Bill 235, sponsored by Senate Finance Committee Chairman John Arthur Smith, D-Deming, would limit the amount of credit a production could claim to $2 million for direct production expenses and $2 million for post-production expenses. The LFC said that of the nearly $82 million in film-production tax credits awarded to 53 different productions in the fiscal year that ended June 30, 2009, 10 were in excess of $2 million, representing nearly 42 percent of the total dollar amount awarded.