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.
Governments provide numerous incentives to encourage firms to choose their region for business or to spur economic development. These incentives vary, but location caterers common strategies include tax credits, grants, financing, enterprise and empowerment zones, and state taxation rates in general. These incentives are increasingly common, having more than tripled since 1990 (Bartik, 2017). An in-depth analysis by the New York Times found 1,874 incentive programs across the U.S., with a total cost of $80.4 billion per year.1 Bartik (2017) projects that, for the entire nation in 2015, state and local business incentives had an annual cost of $45 billion.
Studying the economic impacts of incentives is essential both because of their popularity, especially recently, but also because their effectiveness is still not fully known. Reviews of the literature by Wasylenko (1999), Buss (2001), and Arauzo-Carod et al. (2010) note that the effect of incentives on firm location and economic development is still ambiguous. Some studies find at least moderate positive effects of incentives on firm location (e.g., Bartik, 1985; Bartik, 1989; Walker and Greenstreet, 1991; Papke, 1991; Wu, 2008; Strauss-Kahn and Vives, 2009), while others find a small positive effect or no effect at all (e.g., Schmenner, 1982; Plaut and Pluta, 1983; Carlton, 1983; Schmenner et al., 1987; Blair and Premus, 1987; Dabney, 1991; Lee, 2008).
A particularly useful context to study to determine the effect of incentives is the rapid diffusion of state film incentives (SFIs), which many U.S. states offer to encourage filming.2 The most common and generous forms of SFIs are grants, cash rebates, or refundable or transferable tax credits for filming or motion picture production.
Studying SFIs is illuminating for a few reasons. First, the film industry is one where filming itself is relatively insensitive to locational characteristics, relative to businesses in general deciding where to locate. In the film industry, filming locations are relatively substitutable because the majority of scenes can be shot anywhere.3 Relative to other industries, filmmakers also tend to be less sensitive to local labor and input market characteristics as they usually bring their skilled workers (e.g., principal actors, directors, and managers) with them, and hire locally for less skilled workers (e.g., camera operators, extras) (Tannenwald, 2010; Luther, 2010). Filming also requires much less physical capital investment. Filming is thus relatively “footloose” even given the large agglomeration economies in motion picture production more broadly.4 Cost is becoming the most important decision in where to film, trumping even creative concerns (Christopherson and Rightor, 2010).5
This contrasts with firms in general who base business locations on a broader set of factors (Arauzo-Carod et al., 2010): agglomeration economies, wages, skills or education of the labor force, city population or density, land price and availability, energy costs, building costs, accessible markets for customers or suppliers, union activity or labor laws, climate, local economic conditions, and local public goods. Firms often consider incentives after first selecting finalist locations based on the above factors (Schmenner et al., 1987; Blair and Premus, 1987; Greenstone et al., 2010). This was especially highlighted in the search for Amazon's HQ2.