There’s No Business Like Corporate Welfare

November 25, 2010

It’s a reliable, if not ironclad, rule: Advocacy groups with words such as “responsible,” “concerned,” and “public interest” in their names can’t be trusted.

Skepticism was thus warranted when the Center on Budget and Policy Priorities -- whose “priorities,” those unfamiliar with the group should ask -- issued an examination of state governments’ incentives for the entertainment industry.

This time, no worries. “State Film Subsidies: Not Much Bang for Too Many Bucks,” by economist Robert Tannenwald, is mostly solid.

The “laboratories of democracy” have been handing out outrageously generous giveaways to movies, television programs, commercials, and videogames for years. All types of perks exist, but the most common is a tax credit for production costs. As Tannenwald notes, some allow studios to reduce their tax liability to zero, and even get checks written to them from public treasuries. Where allowed, credits can be sold, often “with the assistance of the state itself and/or a financial intermediary that packages purchased film tax credits from multiple states to make them more attractive to potential purchasers.” (In Massachusetts and Connecticut, banks and insurance companies have benefitted.)

It’s obvious why favorable tax treatment is catnip to studios. In “Movie Production Incentives: Blockbuster Support for Lackluster Policy,” the right-leaning Tax Foundation explained why pols fall over each other to oblige: “[B]ringing Hollywood to town is the best of all possible photo opportunities -- not just a ribbon-cutting to announce new job creation but a ribbon-cutting with a movie or TV star.” But perhaps the fiercest defenders of show-business welfare belong to the corporatism lobby. For the bureaucrats who claim to foster “economic development,” it’s simply another means to boost employment and lay the foundation for a snazzy new industry in their states.

For a couple of early adopters, the propaganda might not be entirely wrong. New Mexico and Louisiana were the first states to peddle perks to Tinseltown. Even Tannenwald admits, “Between 2002 and 2008 their employment in the film and video production industry increased six-fold.”

But for the dozens -- yes, dozens -- of states that adopted similar strategies, benefits have proven illusory.

Take jobs. Southern California became the nation’s motion-picture hub a century ago when filmmakers went west for warmer weather, varied terrain, cheaper labor, and for a time, a refreshing lack of union goons. But over-the-top financial inducements can’t transform every state into an entertainment mecca. Tannenwald observes that insufficient “crew depth” causes productions to import talent. Employment “for in-state residents tend[s] to be spotty, part-time, and relatively low-paying work -- hair dressing, security, carpentry, sanitation, moving, storage, and catering -- that is unlikely to build the foundations of strong economic development in the long term.”

Incentives don’t “pay for themselves,” as numerous studies are starting to reveal. Tannenwald describes the findings of the Massachusetts Department of Revenue: “For every dollar of film tax credits awarded to film producers, the Commonwealth gained only $0.16 in revenue, mostly in the form of income tax revenues withheld from film company employees. The remaining $0.84 had to be financed by higher taxes elsewhere or cuts in public services. Independent studies of film subsidies in other states have estimated similar financial costs, ranging from $0.72 to $0.93 per awarded subsidy dollar.”

So it shouldn’t come as a surprise that subsidy “successes” are struggling. Tannenwald reports that Albuquerque Studios, Inc. filed for bankruptcy in July, and scandals have plagued Louisiana’s program.

Even if you’re a fan of industrial policy, entertainment corporatism doesn’t pass the standard tests. Hollywood is not a nascent business, a la nanotechnology, that “needs” a hand from taxpayer-supported planners. Nor is it an enterprise that’s fallen on hard times due to globalization. The Motion Picture Association of America reports that its members have benefitted, enormously, from free trade. In 2009, non-U.S., non-Canadian receipts accounted for 64 percent of worldwide box office. Revenue just keeps growing -- between 2005 and 2009, theater grosses soared by 29.4 percent, nearly triple the inflation rate.

State-level pols, who usually have as little private-sector experience as their federal counterparts, lack the knowledge necessary to allocate their economies’ resources efficiently. That task belongs to states’ citizens -- millions of buyers and sellers, making advantage-optimizing choices.

There is now abundant evidence that exposes the failure of film, TV, and videogame subsidization. So much research, in fact, that it’s tough to ignore. But governors and state legislators are up to the task. After all, hanging out with action heroes and starlets is much more fun than carefully investigating the true source of economic growth.

D. Dowd Muska (www.dowdmuska.com) writes about government, economics, and technology. Follow him on Twitter @dowdmuska. He lives in Broad Brook, Connecticut.

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