PONTIAC, Mich. — Even the great and powerful Oz could not save the film studio that was supposed to save this town.

The studio, a state-of-the-art facility fit for Hollywood blockbusters, had risen from the ruins of a General Motors complex here. It was the brainchild of a small group of investors with big plans: the studio would attract prestigious filmmakers, and the movie productions would create jobs and pump money into the local economy. A glamorous sheen would rub off on this down-on-its-luck town.

But in Pontiac, happy endings do not usually come Hollywood-style. The tale behind the studio, though, was cinematic in its own right, filled with colorful characters, calls from the White House and a starring role for Michigan’s taxpayers. Rounding out the cast was a big-budget Disney movie, “Oz: The Great and Powerful.”

It all started back in August 2007, when Gov. Jennifer M. Granholm met with Mike Binder, a Michigan-born actor and director who was lamenting the state’s lackluster program to award financial aid — otherwise known as film credits — to the movie industry. Ms. Granholm, an aspiring actress when she was in her early 20s, became determined to make Michigan competitive, she recalled.

Eight months later, the capital of the flailing auto industry became the capital of film tax credits. For every dollar spent locally, filmmakers would receive almost half back from Michigan. That sort of money turns heads at even the richest film studios, and word spreads fast. Janet Lockwood, the director of the state’s film office, said that a week after the enhanced credits were announced, she was besieged at a movie conference in Santa Monica, Calif., by “the baby studios to the big guys.”

Hollywood may make movies about the evils of capitalism, but it rarely works without incentives, which are paid for by taxpayers. Nationwide, about $1.5 billion in tax breaks is awarded to the film industry each year, according to a state-by-state survey by The New York Times.

Within two months, 24 movies had signed up to film in Michigan — up from two the entire year before. The productions estimated that they would spend $195 million filming there, and in return they would be refunded about $70 million in cash.

Before long, residents were rushing out on their lunch breaks to catch a glimpse of celebrities like Drew Barrymore, who was filming her movie “Whip It” in Ann Arbor, and Clint Eastwood, who was shooting “Gran Torino” in the Detroit area. Even Michael Moore, who was filming a movie about corporate welfare called “Capitalism: A Love Story,” sought and received incentives.

A ‘No-Brainer’ for Michigan

It was a time when most financial news was bad. Housing prices plunged, and thousands of automobiles went unsold. Michigan was facing growing budget shortfalls, and some lawmakers who voted for the film credits soon began questioning whether the state could actually afford them.

In Pontiac, tax revenue plummeted as General Motors pulled out and workers left. Half of downtown was boarded up, and landlords accepted rent checks through slits in doors locked for safety. For some, Hollywood provided distraction and hope.

By 2008, a plan was being hatched for what would become the movie studio in Pontiac. The man behind it, Linden Nelson, was a well-connected local entrepreneur with a charismatic personality. He had made a name for himself by creating the removable key chain for valet parkers in the 1980s. His company later manufactured promotional trinkets for brands like AT&T and Harley-Davidson. In the late 1990s, Mr. Nelson found himself in the headlines when a fire broke out at his office in Beverly Hills, Mich. It was ruled accidental.

Mr. Nelson got the idea for the studio, he said, from his college-age son, who had heard that the Michigan tax credits were the talk of the Cannes Film Festival in France that year. Mr. Nelson soon met an old friend, Ari Emanuel, over coffee in Aspen, Colo., to discuss the idea. Mr. Emanuel was the force behind what would become William Morris Endeavor Entertainment, and his fast-talking, take-no-prisoners style had been immortalized in HBO’s “Entourage.” His brother Rahm would soon be named the chief of staff to President Obama.

Intrigued, Mr. Emanuel did not take long to sign on. “I’m, like, blown away by it,” he told a gathering of the Detroit Regional Chamber of Commerce. “Not to use an L.A. phrase — I think this is a no-brainer for the state of Michigan.”

Motown Motion Pictures LLC was incorporated in May 2008, and two more partners came on board. One, John Rakolta Jr., had building expertise as the head of a commercial construction company. The other, A. Alfred Taubman, was a longtime friend of Mr. Nelson and a prominent investor who made billions building shopping malls nationwide.

Mr. Taubman is among the most generous donors to universities and institutions in Michigan and elsewhere. He went to prison for nearly 10 months in 2002 over price-fixing accusations related to Sotheby’s auction house, which his company owned. He has maintained that he was innocent.

When Mr. Taubman first visited the vacated General Motors site in Pontiac, he was brought to tears. “What happened to all the people?” he said, according to Mr. Nelson, who was at his side. “Where are the cars? What happened to their families?”