The MSU Study Fails to Include Costs

Unfortunately, the MSU report was otherwise a flawed product. The authors took pains to explain the workings of the model they employed — known as REMI[*] Policy Insight — and the impact that film industry expenditures had on Michigan's economy through the "multiplier effect." This multiplier effect involves subsequent rounds of spending. For example, a film company may contract with a hotelier, caterer and set designer. Those individuals then spend the money hiring new employees or buying more ingredients to make their products and so on.

The authors reported that due to such multiplier effects, more jobs were created than just the 254 full-time equivalents that were the direct result of the filmmakers' hiring. Rather, the authors concluded, "[F]ilm productions generated 1,102 year-round equivalent jobs in 2008,"[165] and, "Based on generally accepted economic theory, multiplier impacts will increase over time."[166] They reported that with the multiplier effect, annual state economic output would increase by $335.6 million by 2012.[167]

News agencies around the state reported these figures. Nevertheless, the numbers were grossly overstated because the paper's authors excluded the costs associated with the program.

The costs of the Michigan Film Incentive are significant. In 2008, the program is said to have produced $48 million in refundable tax credits;[168] estimates for future years indicate that costs could exceed $200 million.[169] Due to the extraordinarily generous film credits being "refundable," a substantial portion of these costs represents actual cash outlays — State of Michigan checks written to producers — rather than the "forgone revenues" of most targeted tax breaks.

Moreover, these subsidy outlays represent revenue taken from Michigan employers and families. If that money had been left in their hands, it would also have generated a multiplier effect. In other words, if the proponents of film subsidies attribute a multiplier effect on the benefit side, they must also acknowledge the same effect on the cost side.

If taxpayer costs had been entered into the model, the output would have been different — perhaps dramatically so — showing far fewer jobs created, for instance, or even a net job loss.

Thus, when an MSU press release stated that the film incentive law was a "big hit," the claim was based on a model that had been programmed with only the benefits of film expenditures, not the costs.[170] Ignoring these costs in the model is roughly equivalent to a certified public accountant omitting a balance sheet's liabilities and then touting the success of the company.

For a fuller discussion of the MSU study, see the Mackinac Center Policy Brief "Special Effects: Flawed Report on Film Incentive Provides Distorted Lens."[171] Note, however, that concerns over the economic effectiveness of this incentive were recently expressed by yet another organization, the Anderson Economic Group, a Lansing-based consultancy. In a May 2009 study commissioned by the Michigan Education Association, AEG analyzed the effectiveness of eight Michigan tax incentive programs, including the Film Incentive program. Researchers gave the Film Incentive program a "low" rating citing "[v]ery large expenditures; no comparative advantage in this [the film] industry."[172] The AEG study went on to cite transparency issues within the approval and reporting process by the Film Office, commenting, "Moreover, self-reported data and self-interested approval process limit ability to evaluate effectiveness."[173]

[*] REMI is an acronym for Regional Economic Models Inc.

[165] Ibid., Executive Summary.

[166] Ibid.

[167] Ibid., 8.

[168] "Michigan Film Office 2008 Annual Report: Film Industry Refundable Tax Credit Operation and Effectiveness," 4.

[169] David Zin, economist for the Michigan Senate Fiscal Agency, e-mail correspondence with Michael LaFaive, April 29, 2009.

[170] "MSU Study Finds Film Industry Big Hit in Michigan," (Michigan State University, 2009), (accessed August 11, 2009).

[171] Michael D. LaFaive, "Special Effects: Flawed Report on Film Inventive Provides Distored Lens," (Mackinac Center for Public Policy, 2009), (accessed August 24, 2009).

[172] Patrick Anderson, Alex Rosaen, and Hilary Doe, "Michigan's Business Tax Incentives," (Anderson Economic Group, LLC, 2009), http://www.mea .org/investing/MEA_TaxAbatements_Public.pdf (accessed August 25, 2009).

[173] Ibid.