Texas Video Game Industry Doesn’t Need Tax Policy Cheat Codes

January 29, 2014

A column in Forbes today suggested that Texas’ $85 million in tax incentives for video game may be a justified way of creating an industry hub in Austin, and that “the logic behind these incentives is hard to argue.” Unfortunately, the op-ed failed to note that incentives rarely succeed at creating meaningful economic growth, and also appears to disregard the physical structure of video game production.

The author uses the film industry as an analogy, and recounts the interesting story of why Hollywood became a center for movies: not just climate, but because Thomas Edison had a vice-grip on patents for movie production technology, and filmmakers figured that he couldn’t pursue them all the way across state and district court lines to California. Different intellectual property rights in different jurisdictions, combined with some good weather, created an industry.

But not quite. Movies, especially in the early era of film-making, require proximity: actors need to be together so they can interact. Film-makers need to be present too, and the crew as well. It is an industry which requires a significant degree of physical proximity from auditions to first screening. Video games are different. Some of the most innovative video-game companies working today are located in Iceland, Finland, and Washington State, areas which seem quite inhospitably cold to a southerner such as myself.

Furthermore, video game production can take advantage of the Internet: programming doesn’t have to occur all in one place at one time, but can even be crowd-sourced to include user-created content, as in the highly-successful Team Fortress 2. Thus, while film tax credits are ultimately wasteful for states too, there may at least be some “network economies” from film production: but the same thing almost certainly cannot be said for video games.

What does this mean for tax policy? Simply put, policymakers are engaged in a fool’s errand trying to create a video-game production hub. The industry has no special geographic requirements, most of its high-skilled workers are young people willing to relocate for work, and indeed the work is easily segmented to diffuse production sites. Giving tax incentives with the goal of creating a special industry hub is even more misguided in the case of video games than it is for other industries.

Tax incentives distort economic patterns of work and investment. A skilled programmer has lots of job options: video games, industrial programming, medical technology, and other applications. Subsidies for video games come at the expense of these other programming-intense industries, and divert high-value skills away from uses that may have greater utility.

Texas has a robust business climate and strong economic growth. The city of Austin in particular has become a tech hub thanks to good living conditions and excellent educational services complemented by Texas’ zero-income tax environment that attracts high-skill workers and high-growth companies. It’s unnecessary to stack incentives on top of that. If Texas policymakers want to give tax relief to grow the state’s economy, instead of misguided video game incentives, they should probably take a look at the margin tax.

Read more on Texas here.

Read our comprehensive report on film tax incentives here.

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