The Simple Misconception that Keeps People from Recognizing How Big a Scam Film Tax Credits Are

Tim Cavanaugh reports on the homepage that House of Cards is still threatening to leave Maryland if the state doesn’t fund an expansion of its production-tax-credit program — a program, which most states now have, to provide tax benefits to film- and TV-series-production companies.

The empirical economic evidence against such programs is really solid — Tim cites, for instance, research by the notorious Hayekians at the Center on Budget and Policy Priorities. But who trusts that kind of statistical argument, which can be incredibly unreliable?

Well, the theoretical argument against these programs is equally unassailable. The problem is that people often fall prey to explanations like the one Roger Manno, a Maryland state senator who wants to fund an expansion of the credit, gave to Tim when asked about studies showing a bad return on investment for the taxpayer:

Whatever the percentage is, it’s a percentage of an industry that wasn’t in Maryland before the incentive was there. We have determined that they make good economic sense for us. It’s not just sexy. I don’t think any of us are wooed by the shows. It’s kind of neat that they’re here. But we have to make a budget. It has to make economic sense.

I saw a couple pundits on Red Eye a while ago defend the idea of show-biz tax credits on these very grounds — that the program generates economic activity (“an industry that wasn’t in Maryland before the incentive was there”), so the state can certainly afford to give them back some of the taxes they pay, whatever percentage of the taxes it was. Even if you give the producers a 100 percent tax break, and get no tax revenue from them at all, they spend money elsewhere and those businesses generate tax revenue. The economy’s healthier, and the taxpayer comes out ahead. Right?

Wrong. A production tax credit doesn’t just reduce what producers pay in taxes. Rather, it means Maryland basically writes a check every year to the producers equal to 25 percent of the cost of making a series or movie.

In order for Manno’s precious budget to make up for what they’ve just paid the producers, the series has to drive many more times economic activity in the state than the series’ production itself constituted. The production company may pay a little in taxes itself, but you probably need the filming operation to create four or five times the show’s production costs in additional economic activity for taxpayers to come out ahead.

House of Cards viewers will know whether this is about sex or budgets.

Why does a tax benefit involve cutting a check like that, rather than just giving a break on taxes to a new industry? Because production tax benefits aren’t tax deductions, which reduce the dollars on which a firm has to pay taxes, they’re tax credits — which reduce the dollars you have to pay in taxes, period.

This is a fairly simple concept most people already understand, but it’s enormously important here. For individuals and most firms, tax credits are still just a quicker way of reducing your tax liability, and reducing the tax dollars the government takes in, because most people owe the government a lot of taxes to start.

But production companies don’t owe states a lot in taxes — Maryland doesn’t tax out-of-state corporations, which presumably MRC, the firm that produces House of Cards, is; the stars, producers, and gaffers probably have to pay Maryland some individual income taxes on their salaries but those aren’t that substantial; etc. And when a tax credit is refundable, as production tax credits all are, after your tax bill drops to zero, the government starts paying you money. In this case, a lot of money.

Don’t think of this as a tax benefit at all. It’s like Obamacare subsidies, which also arrive as tax credits: The government is just writing you a check and the tax system is how they do it.

In Maryland, that check is equal to 25 percent of the costs of filming the series (in New York, it’s 30 percent). Have a $100 million budget, like the first two seasons of House of Cards did? The state writes you a $25 million check (minus whatever small taxes you owe), and your show only cost $75 million.

I do overstate the upfront fiscal cost to the state slightly, but only because you only get 25 percent of qualifying costs back, and not all $100 million spent on House of Cards is a “qualifying expense.” (States have tried to limit, for instance, the credits paid on actors’ and directors’ salaries.)

And like Obamacare subsidies, it’s not as good as getting a check you can spend on anything — production companies, mainly for cash-flow purposes, usually have to find middlemen to process the tax credits if they want the money right away. This doesn’t help the taxpayer, though, it just means some of the benefits go somewhere besides the producers themselves.

Imagine what it has to get back: In order for taxpayers not to lose money on this, if the average taxes collected on salaries, sales, and corporate income in Maryland is 5 percent, House of Cards has to generate, assuming it pays a 5 percent tax rate on its $100 million budget (which it probably doesn’t) more than four times as much economic activity as producing the show itself constituted in qualifying economic activity.

The only defense of this is as an extremely expensive economic development strategy: That it might create some economic activity, create some new business for Marylanders, and that that’s worth running up Maryland’s deficits or spending less money elsewhere in the budget. Unfortunately, it’s not clear they reliably create any new economic growth at all.

But again, that’s all so much statistical sorcery — what’s most laughable is Manno’s claim that this actually helps balance the budget that he’s so worried about. That is essentially impossible, as I explained. It’s fairly obvious what this is really about.

Before he admitted “it’s kind of neat” that Kate Mara has to hang out in Maryland for part of every year, he spins a train of deceipt that wouldn’t be out of place in a HoC script: “We have determined that [the tax credits] make good economic sense for us. It’s not just sexy. I don’t think any of us are wooed by the shows.”

The reason that politicians write huge checks to movie and TV studios and pretend it makes economic sense, but are never (quite) so audacious with manufacturers or software developers or whatever: The business is sexy, and politicians are easily wooed. Whether you learned it from Frank Underwood or James Buchanan, everyone knows special interests can do powerful things in politics, and just about everyone’s interested in Hollywood — or its employees.

Patrick Brennan — Patrick Brennan is a writer and policy analyst based in Washington, D.C. He was Director of Digital Content for Marco Rubio's presidential campaign, writing op-eds, policy content, and leading the ...

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