Do State Film Tax Credits Benefit Taxpayers ... or Movie Stars?

The highest paid actor in Hollywood last year, according to Forbes magazine, was Johnny Depp, earning an amazing $75 million, significantly more than runners up Ben Stiller and Tom Hanks. Taken as a group, the year's top 10 highest paid actors earned a collective $349 million.

Thousands of miles away, in the relatively affluent state of Massachusetts, the median family income stands at $65,304, roughly 1,150 times less than Depp's take home pay. Why is it, then, that Massachusetts taxpayers are ponying up to support the film industry?Like many others, the Bay State hopes to benefit from big-time movie dollars even as the state's budget is otherwise in disarray. Massachusetts, which is facing a $1.5 billion deficit, offers significant tax breaks to film companies willing to make movies there; the idea is to promote local jobs. A recent report, however, found that a quarter of the costs that qualified for state tax credits in 2009 actually went to payrolls for non-resident actors making more than $1 million.

Since credits are dollar for dollar reductions in the amount of tax due, balancing out that millionaire payroll cost every household in Massachusetts an estimated additional $34.

So does that mean the credit is a bust? Proponents say no, pointing to an increase in movie-making in the state since the credit was signed into law by Gov. Mitt Romney in 2005. In 2009 alone, three hugely successful films were shot on location around the state, Golden Globe winners The Fighter and The Social Network -- both notable for their Massachusetts characters -- and The Town, which stars Boston native Ben Affleck. Supporters of the film credit are quick to point out that stars of the films must pay state taxes on income, including residual income, earned from films made in Massachusetts.

As movie production continues to thrive in the state, a move to cap available film credits was defeated last year -- the Massachusetts film office obviously believes there's a sufficient payoff. Meanwhile, a 2009 report by Ernst and Young claims that New Mexico brought in $1.50 in revenue for each dollar of tax credits it offered.

Other states' taxpayers haven't been so eager to embrace existing credits. More than 40 states have film tax credit programs, pumping nearly $2 billion in tax breaks and incentives into the TV and movie industry over the past two years. New York and California have contributed a huge chunk of that, yet both states are facing massive deficits this year. Similarly, film tax credits were recently expanded in the state of North Carolina, which raised taxes on its own residents.

My own state of Pennsylvania is re-examining its film tax credit program -- despite the success of movies like Baby Mama and Marley and Me, the net growth of the industry appears to be less than $5 million. Newly elected Governor Tom Corbett is considering limiting the scope of the credits. In Iowa, the film tax credit has been making news for all the wrong reasons, including criminal charges against former state employees in the industry. Connecticut has reported a loss on each dollar of investment in the industry, while a bipartisan committee in the Michigan senate showed that the state was actually paying film companies that reported a loss on projects.

All this, however, probably doesn't mean states are ready to toss those film credits. Filmmakers have increasingly threatened to leave the U.S. altogether for countries like Canada and New Zealand, which are more than happy to offer tax breaks in exchange for the publicity. The threat of losing business -- even if new business isn't necessarily being created -- is enough to send most states scurrying for ways to preserve the credits. This is especially true for states whose laws require that films be completed before any tax breaks are realized; the dollars will flow into the state before any outlay is required. That's attractive for state legislatures facing current financial woes. But is it enough for individual taxpayers feeling the burden of higher taxes?