August 10, 2006

The "Race to the Bottom" in Film Tax Credits

Most people agree that state governments ought to be given plenty of freedom to design their own tax systems. Yet this freedom has an unfortunate consequence: states often use their tax systems to compete against each other in ways that leave everyone worse off. As a result, a growing number of good-government advocates are struggling to reconcile their belief in state and local sovereignty with a desire to prevent governments from harming themselves and each other with tax incentives. Every day, it seems, there's a new example of how state tax competition is draining state coffers while complicating tax codes and pushing businesses to make investments they wouldn't otherwise make.

Today's example is from the film-making industry. With the advent of state tax breaks for movie production, "Hollywood" is rapidly becoming more a metaphor than a place, with film production companies accepting tax incentives to film in otherwise not-especially-attractive places. This article from the Raleigh News and Observer purports to trace the history (and recent successes and failures) of North Carolina's tax break for film-making.

The article's author, Craig Jarvis, says that North Carolina has historically been a popular location for filmmakers, but that tax incentives in other states are directly responsible for reducing the popularity of the Tarheel State:
For the past two decades, the state has ranked third in film, TV and commercial revenue, with an average of $300 million pouring in every year. Now one of the most film-friendly states cannot compete in a marketplace that relies on escalating incentives.
What's striking about the article is how little evidence it offers that there really has been a shift in film location decisions away from North Carolina-- and that these shifts can be attributed to more generous tax incentives offered by other states. To hear Jarvis tell it, a very real consequence of the comparatively small North Carolina credit is that "filmmakers are heading to Louisiana and South Carolina, which have passed more alluring come-ons." A strong statement--but Jarvis can offer only anecdotal proof that this is actually happening, and gives very little of that.

The one thing everyone seems to agree on is that these tax credits amount to a bribe-- and even the most ardent advocates of the film breaks seem less than proud about what they're doing. Bill Arnold, director of the NC Film Commission, describes this cross-state competition in bleak terms:
"It's gotten to be a real knock-down, drag-out fight to see who can give away the most money," Arnold said.
In another recent article, a Republican lawmaker makes it clear that she doesn't like the incentive, but believes the state really has no choice:
"Incentives are like nuclear weapons," said Rep. Carolyn Justice, R-Pender. "If everybody has got them, then you're forced to have them."
Hardly a resounding endorsement of this approach to tax policy.

A similar story from Massachusetts, where Ben Affleck has just finished directing his first movie in Boston. In this article, Affleck makes it clear that he really likes Boston, both as a place to be and as a place to film. He also hints that in the past, Boston has had a reputation as "a terrible town to film in," but doesn't say whether that has anything to do with tax incentives. I'll leave it to others with a stronger stomach to do more research on why Ben Affleck does what he does on any given day, but in this case it just sounds like he filmed in Boston because he really likes it.

Not knowing a thing about how film production works, I can imagine that there are a variety of things that the Boston city government could do to make film production easier there: making parking spots available in a crowded urban area (a thing Affleck actually refers to in the article), simplifying the process by which companies apply for permission to film, etc. Of course, taken on its own, a big-ass tax break could certainly ease the pain of coping with these other urban difficulties. But these non-tax approaches are a lot cheaper and a lot more sensible.

As is always true in the tax-incentives world, both the policies and the media coverage seem to be driven by a perception that cannot be verified-- that tax incentives influence business decisions. It would be nice to see a little more skepticism in media discussions of these tax breaks-- or, if possible, a tiny shred of proof that they actually work.


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