State officials are face serious budget problems — some since the financial crisis, and some have been for years now — and yet every year they write millions in checks or, as they call them, “tax incentives,” to different special interests. While this cronyism is often sold to taxpayers as a way to boost the economy and bring business activity into a given state, it’s a huge waste of money and creates serious market distortions.
A good example of this is the tax advantages and subsiidies given to the film industry. The National Conference of State Legislatures has a good breakdown of the different forms of these undeserved privileges for the industry — 45 states have them. They range from Movie Production Incentives (MPIs) meant to encourage film production in-state to tax credits that rebate a portion of the income tax owed to the state by the production company and actual grants distributed to production companies. Only a few states don’t offer these film incentives — two cheers for Delaware, Nebraska, Nevada, New Hampshire, and South Dakota.
Film companies and their lobbyists have sold these schemes to some 45 states on the grounds that subsidies and tax breaks today will somehow “pay for themselves” through more revenue tomorrow (call it M.C. Escher economics). But if this sounds too good to be true, that’s because it is. As my colleague Adam Thierer has noted, eight out of 10 studies of the subject find that these schemes lose more revenue than they generate. The two studies finding positive effects were both paid for by state film offices.
This finding is consistent with a large literature on firm-specific or “targeted” economic development strategies. As a recent study puts it, “the wisest course of action for most cities would be to eschew particularized development incentives, especially those that require tax expenditures.”
Here’s Thierer’s findings in a table, showing that the the revenue clawed back in almost every state program isn’t enough to make up for its cost:
The last one of Mitchell’s objections to the programs is that film subsidies undermine the legitimacy of both business and government:
Objective criteria for playing favorites is hard to come by. So questions inevitably arise when some firms are picked and not others, especially when the favored companies fail to deliver. When this happens, the reputation of both government and business suffers. People come to think of government as a corrupt institution that serves special interests instead of the general welfare and they come to think of capitalism as a game which is rigged for the well-connected.
He also rightly notes that these tax privileges and other handouts encourage film companies to pressure the states to get even more money. The firms’ energy and money could be spent in more productive ways:
When governments hand out privileges, firms will employ armies of tax attorneys, accountants, brokers, and lobbyists in an effort to obtain these privileges. Economists call this “rent-seeking,” though a more intuitive name for it is “privilege-seeking.” Whatever you call it, it is socially wasteful. Instead of producing value for customers, firms expend real resources attempting to capture the biggest slice of a fixed pie.
Just a few weeks ago, TV producer Charlie Goldstein sent a letter to Maryland Governor Martin O’Malley threatening the state to take the production of House of Cards somewhere else if the state didn’t grant the company millions in tax credits.
A few weeks before Season 2 of “House of Cards” debuted online, the show’s production company sent Maryland Gov. Martin O’Malley a letter with this warning: Give us millions more dollars in tax credits, or we will “break down our stage, sets and offices and set up in another state.”
A similar letter went to the speaker of the House of Delegates, Michael E. Busch (D-Anne Arundel), whose wife, Cynthia, briefly appeared in an episode of the Netflix series about an unscrupulous politician — played by Kevin Spacey — who manipulates, threatens and kills to achieve revenge and power….
In his letter to O’Malley, Charlie Goldstein, a Media Rights Capital senior vice president, wrote that the filming schedule for Season 3 has been pushed back to June to ensure that a big enough increase has been approved.
“In the meantime I wanted you to be aware that we are required to look at other states in which to film on the off chance that the legislation does not pass, or does not cover the amount of tax credits for which we would qualify,” the letter says.
“I am sure you can understand that we would not be responsible financiers and a successful production company if we did not have viable options available.”
The letter does not specify the amount of tax credits the show is seeking
I don’t blame the company — this extortion attempt, which I am sure will be successful, makes a lot of sense from their point of view. The people at fault here are lawmakers who are willing to open up their treasury coffers for the slim chance of robbing shoulders with Kevin Spacey and the even slimmer chance that jobs and economic prosperity will follow.
In the case of Maryland, for instance, the claim is that the millions of dollars in tax credits will “created nearly 6,000 jobs and pumped more than $250 million into the state economy.” Never mind that most of these jobs are temporary and often taken from other states and come at great cost to taxpayers.
Like all other subsidies to private companies, these film subsidies should be terminated. If lawmakers are truly interested in creating economic growth and a pro-business environment in their state, they are better off providing a low-tax-rate environment for every company, not just a few, and a stable and light regulatory regime.