This commentary originally appeared in Forbes on August 3, 2016.
The most-populous state is giving the largest entertainment company the biggest ever film subsidy—what could go wrong? The Los Angeles Times reported that The Walt Disney Company will receive $18 million in state tax credits—$1.43 per household—to produce “A Wrinkle in Time” in the Golden State. Of course, if Disney executives think a film will make a profit, they’re likely to greenlight it, with state tax credits being a secondary consideration insofar as where the project will be shot.
Of the 50 states and the District of Columbia, only 16 don’t offer some sort of tax credit to attract Hollywood’s cool kids to town. Georgia and Kentucky offer the most generous subsidies to Hollywood, according to a firm that specializes in maximizing tax benefits for the movie industry. Kentucky even offers an additional 35 percent in tax credits to use Kentuckians in the project, more in rural areas.
In a financially-stressed California in 2009, once and future actor Gov. Arnold Schwarzenegger backed $200 million in film tax credits. The tax breaks passed. Republicans, somewhat uneasy about supporting a tax cut for an industry overwhelmingly dominated by liberals, went along, rationalizing their support by noting that, in heavily taxed California, any sort of tax reduction for anyone was to be supported.
The irony was that while the California legislature was cutting taxes for the beautiful people of Hollywood, they raised taxes on everyone else by $12.5 billion by hiking sales taxes, income taxes, vehicle taxes and taxes on families. State government spending was also temporarily cut by $14.8 billion.
A year later, the Screen Actors Guild government relations manager noted of the 77 projects that received $200 million in tax credits, “This is a terrific success and further reinforces the importance of tax incentives to the state economy. The positive effects of these tax credits echo throughout California and bring widespread benefit to the entire state… By working together, we can bring entertainment and related industry jobs back to California.”
The Screen Actors Guild seemed to be saying here that tax cuts boost the economy.
When tax cuts are for me, they boost the economy; when for thee, they cost too much.
When I served as vice chairman of the Assembly Committee on Revenue and Taxation in California, I had an interesting exchange with a Democrat sponsoring a Hollywood tax break bill:
Me: “So, you believe that a tax break for film production will stimulate more film industry activity in California?”
Democrat: “Yes, that’s the intent of my bill.”
Me: “So tax breaks lead to more economic activity?”
Me: “Well, then if that’s the case, why don’t we provide tax breaks for manufacturing or other industries, rather than just select Hollywood for this special favor? Aren’t you just picking winners and losers?”
Democrat: “We can’t afford to give a tax break to everyone.”
It has been said that politics is Hollywood for ugly people. This might explain the broad support in legislatures across the nation for film tax credits—voting for a movie-making tax break is as close to Hollywood as most politicians will ever get.
Even conservative Texas offers tax breaks for Hollywood, rating 3 of 5 stars for its largess, the same as California. Although Texas, unlike California, has an additional stipulation: if you mess with Texas, portraying Texas or Texans in an unflattering light, you may not get your tax break after your film is completed.
A film project offers a temporary economic boost, but manufacturing and other businesses tend to create more stable and long-term employment. Of course, these industries can enjoy tax breaks as well. The challenge is when politicians yield to the temptation to wield the power of government tip the scales for favored industries. As with film subsidies, this leads to crony corporatism—it’s just far less visible but just as distorting to the economy as politics, rather than economics, influences decisions on how, where and when to invest.
For instance, Texas often provides tax breaks for companies to move or expand in Texas. The problem is, existing companies can’t get the same consideration, leading to de facto discrimination against long-standing Texas firms. Further, unlike an objective tax form, where a filer simply fills in numbers or checks boxes, with the tax being predictable and easily calculated, many competitive tax incentives require political decisions, opening up valuable tax breaks to manipulation by companies employing well-placed lobbyists as well as a strategic political donation or two.
Even something as simple as property taxes can be subject to political favoritism. In Houston, more than a quarter billion dollars in property tax exemptions have been granted for commercial properties. Because Texas doesn’t base property taxes on the actual sale of the property, taxes are subject to an appraisal, as a result, appraisals largely determine tax liability, with some favored businesses being more equal than others.
The bottom line is that taxes should be as simple, transparent and consistent, with who you know having nothing to do with your tax bill and with a steel mill paying the same tax rate as a Hollywood studio.