Arkansas has made great strides in recent years toward eliminating our work-punishing income tax. Our top income tax rate (which is what most workers pay) is now one of the lowest in the region.
No doubt, as Governor Sarah Sanders herself has recently reiterated, ending the income tax is “the prize” and should remain the north star that policymakers pursue until it is fully off the books.
But there are several threats looming that would make income tax repeal more difficult, and they may not be obvious at first glance.
Perhaps the most imminent is something called the “Digital Product and Motion Picture Industry Development Act,” sometimes referred to as a film tax credit—or, as we called it in our 2023 Opportunity Scorecard, the Hollywood handout.
This tax incentive, first established in 2009, has been expanded several times over the past 15 years and it appears policymakers are poised to expand it yet again.
Why? Well, its staunch advocates have insisted that, although costly, this program is worth the investment because of all the “economic activity” it generates—especially for aspiring Arkansas filmmakers. The state should take your money and instead give it to them on this basis, they argue—government knows best, after all.
But a recent academic study shows that this tax scheme costs taxpayers money.
Even worse, original data obtained and analyzed by Opportunity Arkansas reveals that the vast majority of the incentives do not go to Arkansas filmmakers. Instead, they go out of state to Hollywood- and New York-based companies.
HOW ARKANSAS’S HOLLYWOOD HANDOUT HAS CHANGED OVER TIME
The 2009 Digital Product and Motion Picture Development Act put the current basic form of this tax credit into motion, providing for a 15 percent rebate for the production costs of qualifying in-state film products that spent at least $50,000 in Arkansas, with an additional 10 percent rebate for certain below-the-line employees who were Arkansas residents. Another 15 percent post-production rebate was also created for post-production costs, with yet another 10 percent credit for below-the-line employees who were Arkansas residents.
However, since that time, this “Hollywood handout” has been morphed and expanded over and over again, as recently as the last legislative session:
- Act 496 of 2013: Act 496 raised the cost threshold for a qualifying product from $50,000 to $200,000 for production rebates (kept at $50,000 for post-production rebates), but also dramatically increased the rebate program. Higher-income employees could now qualify for the 10 percent employee rebate (up to the first $500,000 of their salary), and both the production and post-production rebates were increased from 15 percent to 20 percent of costs. More qualifying expenses were also added to the amount eligible for a production rebate.
- Act 797 of 2021: Act 797 transformed the rebate into a transferable tax credit, with similar qualifying percentages to the rebate program. The credit was capped at $4 million per year.
- Act 517 of 2023: Act 517 increased both the production and post-production rebates from 20 percent to 25 percent and added an additional five percent incentive for hiring employees from depressed counties in Arkansas, and added yet another five percent incentive for qualifying expenses that are part of a multi-project production, such as a TV show.
Over the 14-year period, ranging from 2009 to 2023, the Hollywood handout was dramatically expanded to include more qualifying expenses with even greater incentives, growing the size and scope of this giveaway to special interests.
Film companies are getting more and more from taxpayers. But what are taxpayers getting? Well, not much.
ACADEMIC STUDY SHOWS TAXPAYERS SPEND MORE THAN THEY GET BACK ON FILM SUBSIDIES
The Arkansas Economic Development Institute (AEDI) recently conducted an in-depth study on Arkansas’s film credit scheme. Their findings were clear: This program has not generated returns for taxpayers.
Indeed, taxpayers are losing money more than a decade after this program began. And, at best, these incentives are just helping the industry tread water.
Well, okay, so we aren’t exactly recouping our investments. But at least this money is going into the Arkansas economy and helping out aspiring entrepreneurs, right? If only.
ARKANSAS TAXPAYERS HAVE FOOTED THE BILL FOR $14 MILLION IN HOLLYWOOD HANDOUTS SINCE 2020, MOST OF WHICH WENT TO OUT-OF-STATE COMPANIES
AEDI also found that most of the payroll expenditures have gone out of state, not to Arkansas entrepreneurs. But how much, to whom, and by what margin? The AEDI study did not disclose that information—so we decided to find out.
According to never-before-seen data obtained by Opportunity Arkansas—a sample of five years of credits, from 2020 through 2024—approximately $14.28 million was granted in rebates and credits to filmmakers via the Hollywood handout.
Here is the full list, published here for the first time:
If you’re like me, you probably wouldn’t spend $20 to take your family to see any of these films—but you’re paying for their production nonetheless.
Our analysis also found that, despite what advocates claim, the vast majority of the credits go out of state—often to states and companies that hate Arkansas and our way of life.
In fact, a piddly 15 percent of the credits went to Arkansas companies; an astonishing 85 percent went to out-of-state enterprises.
The bulk—$11 million—went to a subsidiary of HBO (not exactly your Arkansas-loving, mom-and-pop, American values corporation) for the filming of True Detective.
While the average credit size is $620,000 for all companies, it is just $166,000 for in-state entities compared to a shocking $1.21 million for credits to out-of-state companies.
THERE IS ADDITIONAL, MOUNTING EVIDENCE THAT TAXPAYERS ARE NOT GETTING THEIR MONEY’S WORTH
Additional studies from a variety of states have found similar results as AEDI.
A study in the American Review of Public Administration found that tax credits had little effect on major employment and economic indicators.
Similarly, a report by the Mercatus Center flagged that “film tax credits don’t deliver to state economies what they cost to treasuries and taxpayers.”
A National Bureau of Economic Research (NBER) working paper opined that “there is no meaningful effect on feature films, and employment, wages, and establishments in the film industry and in related industries. These results show that the ability for tax incentives to affect business location decisions and economic development is mixed, suggesting that even with aggressive incentives, and ‘footloose’ filming, incentives can have little impact.”
A Tax Foundation report stated it most eloquently: “While broad-based tax competition often benefits consumers and spurs economic growth and development, industry-specific tax competition transfers wealth from the many to the few. Movie production incentives are costly and fail to live up to their promises.”
The consensus is clear: Film tax credits don’t work for taxpayers—only for special interests.
LAWMAKERS ARE PLANNING TO EXPAND THE HOLLYWOOD HANDOUT BEFORE SESSION ENDS
Despite a growing body of evidence that these film giveaways don’t even pay for themselves, the legislature recently approved the expenditure of $100,000 in taxpayer money to “study” the film credit. The study is expected to drop any day now—but no matter, lawmakers seem to have already made up their minds, signaling they want to expand the taxpayer-funded scheme.
As recently reported by Arkansas Business:
“[Filmmakers who stand to benefit from the tax giveaway] have been working with state Sens. Jonathan Dismang, R-Searcy, and Clarke Tucker, D-Little Rock, on legislation to fund a filmmaking rebate by appropriation. They expect a proposal to take shape after Olsberg issues its report next month.”
(Kind of makes you wonder why we wasted $100,000 on a study if their minds were already made up, doesn’t it?)
Governor Sarah Sanders and House Speaker Brian Evans also recently commented on the matter, stopping short of full-throated endorsements of the Hollywood handout, but indicated they want to see the results of the study before forming more firm opinions on the matter.
BOTTOM LINE: THE HOLLYWOOD HANDOUT IS A RAW DEAL FOR ARKANSAS TAXPAYERS
In the private sector, the Hollywood handout’s failures to deliver real results for taxpayers—for more than 15 years—would clearly be seen as a bad investment and a bad model. A serious businessperson would stop throwing good money after bad ideas and cut their losses. That’s certainly what the hardworking entrepreneurs across Arkansas who are being taxed to help pay for these film incentives would do. But government too often prefers to turn a blind eye to the lack of results and just keep writing checks.
Perhaps most troubling, these giveaways make it more difficult for Arkansas to provide further income tax relief to working Arkansans.
The choice seems to be: more income tax relief for working Arkansans or more giveaways for Hollywood executives.
That seems like an easy choice to me.
It would be much better to just leave this money in taxpayers’s pockets in the first place, instead of state government taking it and spending it how they see fit.
Study after study has found that these film tax schemes don’t grow the economy but instead transfer wealth from taxpayers to the politically connected few.
Arkansans can and should keep their eyes on this upcoming legislation—which will be yet another carve-out for selected out-of-state industries while everyday Arkansans continue to wait for more income tax relief.
Conservatives often (and appropriately) rail against government picking ‘winners and losers.’ In this case, government has picked two losers: 1) taxpayers and 2) a film industry that’s failing to generate real returns for taxpayers.
It should be scrapped entirely; but at the very least, it should not be expanded.
