Minneapolis Fed on tax incentives for film companies
I landed a few quotes in a story on the practice of state and local lawmakers handing out tax incentives to lure filmmakers in the September issue of fedgazette, from the Federal Reserve Bank of Minneapolis. Some clips from the piece:
...[J]ust how much film incentives cost and how much is gained remain a mystery in most programs. The Tax Foundation’s Chamberlain noted that there are no studies by economists that determine the financial benefits or costs of film incentives because very few governments track their costs and tax benefits.
It may be a compelling argument from state and local officials about getting more than you had before, Chamberlain said. “But it’s really a wash or loss.” He added, however, that “you’ll never convince [politicians] that it’s not a good idea—the payoff is too big.” Chamberlain said he once heard another economist describe the incentive issue this way: Incentives were not designed to create jobs but to create job announcements. This may be a little harsh, but “the literature speaks with one voice,” Chamberlain said. “At the national level, this does nothing to spur more activity.”
From an economist’s viewpoint, these are terrible policies, Chamberlain said. In the long run, incentives will erode the tax base because they favor certain (often new) businesses over others, and the tax burden falls disproportionately on existing businesses. The notion of incentives as an investment leaves something to be desired as well. To be considered an investment, incentives should return the original capital plus some profit—in other words, after all the adding and subtracting, incentives should lead to higher total tax revenue…
Chamberlain, from the Tax Foundation, acknowledged that states face a classic prisoner’s dilemma. Here, two crime suspects interviewed separately are offered reduced sentences if each rats the other out; if both stay mum, they’ll go free. But because they are separated, neither trusts the other to keep quiet—so each rats on the other in order to secure a lesser sentence, and ultimately both are worse off.
Incentives work the same way, Chamberlain said. If all states eliminated incentives, they would all be better off; films would still get made, and they would go to the most optimal locations, while states could focus scarce tax dollars on traditional public goods rather than on film incentives. But they’re unable to do so because they can’t trust other states to do the same, and doing nothing is even worse, because states lose economic activity to others offering incentives.
Michigan’s Lockwood believes the incentive game has gotten out of hand, with each state upping the ante a little more. Chamberlain and others suggest that federal legislation may offer the only resolution, essentially legislating a cease-fire to the incentive arms race.
Posted by Andrew on Sunday September 10, 2006 | Feedback?
