A new report produced by the California Legislative Analyst’s Office (LAO) has raised some serious concerns about California’s tax credit program. The report does an excellent job carefully outlining the theoretical arguments against film subsidies (distortions and concerns about taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. burdens), as well as the theoretical arguments for (film is a flagship industry with high-paying jobs, and interstate competition).
But beyond these well-trod battle lines, the LAO report takes a stab at outlining factors to consider in creating policy moving forward. They identify six such factors:
1. Film and television production in California could decline anyway.
2. Responding to other jurisdictions’ subsidies could be very expensive.
3. Interstate and international competition could stoke a “race to the bottom.”
4. For state government, the film tax credit does not “pay for itself.”
5. Subsidizing one industry sets an awkward precedent.
6. It will be difficult to evaluate the effectiveness of the film tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. .
We would add that these programs seem to be magnets for unsavory political activity, such as in Iowa, Maryland, and California itself.
That list raises essential points worth reiterating. Film subsidies aren’t cheap, coming to around $1.5 billion per year. The LAO report suggests that expanding California’s program to be competitive with New York or Louisiana’s could cost up to $1 billion. That’s not trivial money. It would have to come from somewhere. Will Californians cut schools and public safety for those tax credits?
This is an especially pressing question because, as the LAO report makes clear, film credits do not pay for themselves. They lose money for the state government. Unlike broad-based tax reform which can result in some degree of revenue recapture from economic growth, narrow tax incentives don’t. They just shuffle around investment rather than creating new economic growth.
The result, of course, is favoritism. Favoritism for a politically-connected industry, but also for a region. The LAO report points out that the overwhelming majority of film production in California occurs in Los Angeles County. That being the case, it’s not clear why a tech company in Silicon Valley or a farmer in the Central Valley should foot the bill: the benefits are all in Los Angeles. How many other California localities would love to have their local industries specially protected? This basic problem of sectoral and regional distortion raises concerns about both fairness and economic efficiency.
Going forward, California policymakers have much to consider from this report. If film tax credits result in major revenue losses for highly uncertain outcomes, create large income transfers from one part of the state to another, are unaccountable and hard to evaluate, and lead to some sectors or industries being taxed much more than others, then policymakers will need to subject the film tax credit program to significant scrutiny. As the LAO report suggests, it may be that California’s state government has an interest in defending a flagship industry from distortionary subsidies in other states: but tax subsidies are a deeply problematic way of doing so.
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