You may remember the intense back-and-forth between the state of Maryland and the production of the TV series House of Cards over how large a subsidy the show would get. The producers wanted $15 million for filming its third season in the state, on top of the $26.6 million in Maryland tax credits it already received for its first two seasons. The state couldn’t secure the votes for such a big subsidy, and the producers soon started threatening to leave the state and set shop in another one. At the end of April, the parties finally agreed on $4 million in tax credits and $7.5 million in grants, and production is set to resume soon.
Announcing the deal, Governor O’Malley said, “Spoiler alert: we’re going to keep the 3,700 jobs and more than $100 million of economic activity and investment that ‘House of Cards’ generates right here in Maryland.” It would be nice if this were actually a good deal for taxpayers, but it isn’t. We know that because several rigorous studies have done on whether any programs like this work or create useful economic growth in-state. For instance:
Massachusetts did a study that found the overwhelming number of jobs generated by location shoots went to out-of-state workers.
College of Charleston economic analyst Frank Hefner found that of each tax credit dollar offered by South Carolina, just 19 cents came back to the state.
The Louisiana Legislature’s chief economist, Greg Albrecht, reported that incentives were likely costing the state millions more than it was generating. “Does [the state] receive more tax receipts back, either directly or indirectly, than what we’re paying out?” he wrote. “The answer is definitely no.”
Meanwhile, critics of incentives were increasing. Economist Bob Tannenwald of the Center on Budget and Policy Priorities said “the revenue forgone via film tax credits has to be made up elsewhere, either in tax increases or spending cuts. Both depress the economy and cut off the incentive’s stimulus effect.”
In California, there was evidence that the number of film jobs created after tax incentives were enacted declined. TV and film production jobs went from almost 123,000 in 2004 to 107,400 in 2012. The state’s legislative fiscal analyst reported twice—in 2010 and 2014—that incentives were of dubious value to the state. (It didn’t help that they may have fostered corruption. Sen. Ron Calderon, a Democrat from California’s 30th senate district, is under indictment for allegedly accepting money to try to expand the state’s movie incentive program to independent producers.)
Interestingly, as a result of this evidence, states have started backing away to some degree from these “production tax credits.” In 2010, some 43 states were offering incentives; it’s now down to 39.
Yet oblivious to the evidence, the state of Nevada (an actual great success story of how a state can attract lots of movie and TV productions with no incentives) has decided to join the dark side and start offering them. To find out how it happened, check out this great feature story on the issue published today in the Reno News & Review.
But the evidence against targeted benefits for specific interests or industries, unsurprisingly, is not limited to the movie and TV industry. A new study by George Mason University’s Chris Coyne and Lotta Moberg makes a very comprehensive case that targeted benefits generally fail to achieve their stated goals, and they have major negative consequences such as misallocation of resources, an increase in lobbying and other rent-seeking, an increase in cronyism, and a bias toward large firms. A short explainer of two of those downsides:
Companies end up expending resources on the political relationships necessary to secure future gains in the form of targeted benefits. These are resources that would otherwise be used for wealth creation. To affect policy, businesses create the impression that they are willing to relocate, and signal to policymakers that they fulfill the criteria of a suitable benefit recipient.
Just as productive entrepreneurship leads to further wealth-creating activities, rent-seeking can multiply and create further economic woes.
- Companies begin to habitually serve political interests instead of satisfying consumer needs, and political competition replaces market competition. Consequently, cronyism—the established practice of exchanging favors between powerful people in politics and business—may become entrenched in the social fabric of a state.
- Increasing cronyism increases the demand for those who are skilled in lobbying and creating political connections. There is a growing industry of “location consultants,” some of whom demand up to 30 percent of the subsidies they negotiate, who assist companies seeking to relocate based on the best benefits package offered by state and local governments. Cronyism can become institutionalized as politics becomes a key factor for the economic sustainability of private businesses. In the future, the companies that succeed will be the ones that are most efficient at rent-seeking and influencing policy, not the ones offering the best products to consumers.
The whole thing is here and is, in my opinion, the reference so far on this issue. But here’s what I find sad: Targeted benefits is a bipartisan pastime, but Republican lawmakers should know better. They can claim to be pro-market and can try to convince taxpayers and commentators like me that they are being pro-market (I’m talking to you, Governor Kasich), but when they support policies like this, no one should fall for it. Targeted benefits aren’t pro-market, they’re pro-business. There is a world of difference between the two.