Tax Credits for Mario and Luigi

May 30, 2006

You’ve all heard of the movie industry receiving special tax provisions and credits from jurisdictions all across the country trying to entice the next movie to be shot in their city or state, but now video game designers are trying to get in on the action. In the North Carolina legislature, the Video Game Producer Tax Credit has been introduced.

Credit. – A taxpayer that produces digital interactive media is allowed a credit against the taxes imposed by this Part equal to fifteen percent (15%) of the taxpayer’s qualifying expenses. The credit allowed by this section may not exceed the amount of tax imposed by this Part for the taxable year reduced by the sum of all credits allowable. This limitation applies to the cumulative amount of a credit allowed in any tax year, including carryforwards. Any unused portion of a credit allowed under this section may be carried forward for the next succeeding five years.

But there are always exceptions. From section c:

Limitation. – No credit is allowed under this section for qualifying expenses with respect to digital interactive media that contain material that is obscene, as defined in G.S. 14‑190.1.

A special tax provision is usually socially beneficial only when there exists some public good component to what is being given the preferential treatment. In other words, would video games be underproduced relative to the optimal social level if this credit was not in existence? Probably not. Would this provision lead to higher taxes on everyone else? Yes, unless they cut spending. And would this special credit lead to too much investment in the video game sector relative to other forms of investment? Probably.

Even if this moves video game production from other parts of the country into North Carolina with only a small impact on the overall level of video game production, this provision would still mean that the tax code and government would be doing the allocating of resources across industries and across geography. This would thereby be the state not allowing the existing comparative advantages to determine the most efficient production method.

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