Over at AEI, Mark Perry put together a chart that got a lot of attention yesterday. The chart shows that for the first time ever, Americans are spending more money at restaurants and bars than they spend at grocery...
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Virginia Lawmakers Debate Film Credits vs. Film Grants, and Entirely Miss the Point
The House and Senate in the Virginia General Assembly are squabbling over how to best implement one of the most politically popular bad tax policies of recent times: film production incentives (to see all the reasons why film incentives are terrible policy, check out our Special Report on the topic).
Option one: offer a few refundable tax credits. There is a credit for up to 20% of qualifying expenses, plus a credit up to 20% for pay to Virginia residents, plus a credit for 10% of pay to Virginia residents employed for the first time in film or TV production. The refundable credit approach is preferred by the House of Representatives. Providing a 'refundable' credit means that the amount of tax owed by the production firm does not limit the amount of credit they can receive. For example, if a firm has a $400,000 tax liability and a $1 million refundable credit, their tax liability is reduced to zero and they receive a check from the state of Virginia for the remaining $600,000. A non-refundable credit would reduce the firm's tax liability to zero but would not provide the additional $600,000 check. So in essence, the refundable credit funnels government spending through the tax code and functions much like a grant.
Option two: offer actual grants. Grants, preferred by the Senate, would be given to qualifying film productions on the same basis and rates described above. Either way, the overall program cost would be limited (for now) to $5 million per biennium, so the main differences between the two options are administrative and budgetary. The administrative differences will appear in how firms apply for the credits/grants and how they are doled out, with the grant application process possibly being more rigorous. But economically the two are equivalent.
The only real difference is that the grant program would officially be labeled as government spending (which it is) and therefore would be pitted against other state spending priorities. Revenue would be collected and then legislators would have to decide whether to spend limited resources on essential government services or corporate welfare for film producers.
Refundable tax credits, on the other hand, are usually viewed by lawmakers simply as a reduction in taxes. Since that money never shows up as tax revenue, lawmakers never see it and they never think about where it goes. Out of sight, out of mind. By disguising spending as tax credits, payments that would be unjustifiable as spending programs go unnoticed or are rationalized as "tax cuts." The fact the the debate in Virginia focuses on whether to call the incentives "credits" or "grants" serves to illustrate the arbitrariness of the distinction between targetted tax cuts and targetted spending programs.
It should be noted that Gov. McDonnell already has his own discretionary Motion Picture Opportunity Fund and he is requesting be increased to $2 million. The credit/grant program described above would be in addition to that fund.
One more note. If Virginia lawmakers think implementing a program worth $2.5 million annually will turn the state into an attractive location for years to come, they are sorely mistaken. Forty-four states offer film incentives and many programs are measured in tens or even hundreds of millions of dollars. There is a wild bidding war going on between states. Just take a look at California, which recently adopted film tax credits in a frantic effort to stem the tide of productions flowing to other states. If any state ever had a "permanent industry" built on existing infrastructure a perfect shooting conditions, it was California. But it's all about the money now and they were being outbid. And there is no end in sight in this arms race of tax incentives. In the end, if everyone is offering the credits, who really wins?
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