Virginia Missed the Starting Gun, but Joins the Race to the Bottom Nonetheless

February 11, 2010

Virginia Gov. Bob McDonnell is pushing several plans in his attempt to focus on jobs. One of those bills would create various incentives designed to lure film productions into the state. One provision would create a film tax credit worth up to 20% of a film production’s expenses. Another credit would equal up to 20% of payroll for Virginia residents employed in the production. While film tax credits and incentives often look attractive on the surface, they suffer from a fatal flaw and ultimately fail to live up to their promises.

The fatal flaw in film tax credits is that they represent what economists refer to as a race to the bottom. In a race to the bottom an individual upsets a natural equilibrium by trying to tilt the playing field in their favor at the expense of the other individuals, which elicits a retaliatory response from the other individuals. The end result is that all involved are left with a less favorable result than when they started.

States are currently engaged in this race, a kind of biding war for film productions. The early adopters like Louisiana and Michigan may have seen a net benefit for a short time if they did not have to offer a large subsidy, but now that there are 44 states offering film incentives the real winners are the film producers who have learned to leverage states against one another. And the subsidies will only continue to increase as lawmakers enthusiastically continue to give money away. Eventually, states may reach a limit to what they can offer, and the playing field will again be level, only now film producers will be reaping all the benefit.

At some point states will fail to see a net benefit from these incentives, that is, they will be giving away more money than they receive in benefits. Unfortunately, there is reason to believe that this point has been reached long ago. This is because the supposed benefits from film tax credits are greatly exaggerated. They often fail at long-term job creation, and more often just shift jobs around the economy and between states. Lawmakers claim that film incentives pay for themselves by increasing economic activity and tax revenues, but this can only be true under very generous and unwarranted assumptions. And don’t forget the censorship.

Film incentives are really just corporate welfare for film producers at the expense on the nation’s taxpayers. For more detail on film tax incentives see Tax Foundation Special Report No. 173, Movie Production Incentives: Blockbuster Support for Lackluster Policy.

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