Film Tax Credits: Lower Taxes for Celebrities, Higher Taxes for You

May 30, 2008

Illinois Governor Rod Blagojevich (D) this week signed H.B. 2482, which extends that state’s film tax credit for another year. The credit was first established in 2003, and boosters say it has brought more film production to the state. Some thirty states have similar film tax credits, which (depending on the state) reimburse sales and even income and payroll taxes paid on production and editing costs.

No doubt, since it’s corporate welfare. The recipients of such welfare aren’t who you talk to if you want a genuine evaluation of the costs and benefits (incidentally, costs and benefits before and after are almost never studied with film credits; it’s just assumed that the new jobs are worth the cost). There was a bit of insight from producer John Bosher, when he told Daily Tax Report that the credit “gives us the ability to assuage investor concern by providing a guaranteed 15 to 20% return on their investment.” Guaranteed 15 to 20% return? This is not a struggling industry.

It’s cool to see your hometown on the silver screen, and politicians love to be hobnobbing with movie stars and giving giant checks to famous directors. But if a movie company doesn’t want to film in your state because your tax system is broken, applying a band-aid exemption for just one industry isn’t the path to prosperity.

Film credits also create their own unique issues. First, they start a race to the bottom among the states; each state wants to lure production from other states, so they all offer larger and larger subsidies and tax breaks. But because the state doesn’t cut spending, those giveaways need to be matched with higher taxes on everything else. It also distorts decisions, since economic activity is no longer going where its most productive (lowest labor costs, good scenery, nice weather, more investors, etc.), but instead to where the tax system is most distorted.

We summed it up a few years ago:

Ultimately, the main beneficiaries are not taxpayers but lawmakers. Every incentive package that attracts a rent-seeking company allows lawmakers to make public announcements taking credit for “new jobs.” Location-based incentives can therefore be thought of as a market transaction between lawmakers and film companies. Lawmakers purchase favorable media coverage for themselves, film companies accept payment for filming in economically unprofitable places, and taxpayers finance the deal. It’s hard to see how that’s good policy.

And then there’s the censorship. After all, when government is essentially co-financing the deal, you shouldn’t be surprised when they start telling you what should or shouldn’t be in the movie.

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