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Joe Karaganis

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The War Between the States (to Subsidize Hollywood)

Posted: 10/20/11 05:56 PM ET

A few weeks ago I was writing about the future of the roughly $3 billion per year that European countries spend on subsidies for movie and TV production and wondering how American producers and studios stayed free of the paternalistic state and its stifling effects on creativity and free enterprise. Unfortunately, these thoughts coincided with news that New Jersey had provided a $420,000 subsidy to Jersey Shore -- the universally scorned yet hugely popular reality show. How have they avoided it? They haven't. Quite the contrary.

As many news outlets reported, New Jersey Governor Chris Christie quickly revoked the subsidy on the hilarious grounds that Jersey Shore didn't present a positive image of New Jersey -- not because subsidies to highly-profitable productions, whether crap or not, are bad public policy. Strangely, this turns out to be a common predicament among Republican presidential hopefuls: in 2009, Governor Rick Perry announced Texas' expanded state subsidies for film production at Richard Rodriguez' Austin studio. In 2010, the Texas film board revoked a $1.75 million subsidy for Rodriguez' Machete -- a $10 million revenge film that took in $26 million at the box office (US). Somehow, Machete also failed to portray Texas in a favorable light. Predictably, Rodriguez said that, without the subsidy, he would have made the film somewhere else.

What are these anachronistic censorship disputes about? It's probably best to think of them as the friction in a larger process of industry capture of state governments. The real question is: what's going on with all these subsidies?

By most independent accounts, they're the product of a massive rent seeking campaign by producers and studios, built up almost entirely in the past decade, and backed by lots of self-serving, industry-funded research. For someone who usually studies intellectual property policy making, this side of the creative economy in the past decade looks very familiar.

William Luther and Joseph Henchman at the DC-based Tax Foundation have been on this case for a few years and have counted up the various subsidies and documented the gimmicks used to justify them. The most striking fact is that TV and film subsidies have exploded in the past decade from around $1 million in 2002 to $1.4 billion in 2010. Five states had subsidy programs in 2003. Forty had them in 2010. Henchmen argues that this wave may have peaked as states face massive budget shortfalls. One can hope so, but it may be wishful thinking to assume that this reflects a tipping point in the evaluation of these programs. Overall, Henchmen and Luther describe tremendously successful rent seeking at the state level, capitalizing on the competition between states to lure and retain businesses through payouts of public money.

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Luther explains at some length how industry (and state film boards) sell these payouts as economic programs. The strategies are pretty familiar and, at this point, should probably be elevated to the canon of corporate rent seeking strategies in America. They include, first and foremost, ignoring the comparative value of investing money in other areas, such as schools or infrastructure or more general tax breaks. They include inflating the value of multipliers used to measure surrounding economic activity and -- as a corollary -- pretending that the subsidies pay for themselves by generating new tax revenue. They conflate short term production jobs and permanent jobs, and ascribe the full economic value of the production to the subsidy. The short answer is that these are simply not economically efficient uses of public money. Here's how Joseph Zin put it in his rigorous analysis of Michigan's sad bid to become a magnet for film production:

Current information suggests that $37.5 million in credits during FY 2008-09 reflected approximately $97.7 million in private spending, of which an estimated 47.4% ($46.3 million) effectively left Michigan and did not contribute to the State's economic activity. After also accounting for reductions in government expenditures necessary to maintain a balanced budget under the credits, the State spent $37.5 million in FY 2008-09 to generate $21.1 million in private sector activity and will have spent $100.0 million in FY 2009-10 to generate $59.5 million in private sector activity.

....

Media productions during 2008 are estimated to have generated approximately 216.0 direct fulltime-equated (FTE) jobs and increased total State employment by 937.3 FTE jobs, while Michigan wage and salary employment declined by 198,000 jobs between December 2007 and December 2008. The cost to taxpayers of employment associated with the tax credit ranged from $186,519 per job to $42,991 per job, depending on whether only direct jobs or total employment impacts are examined. In 2009, approximately 355.5 FTE direct positions were created, increasing total State employment by an estimated 1,542.3 FTE jobs, while Michigan wage and salary employment declined by 204,000 jobs between December 2008 and December 2009.

....

Had the money associated with the credit been spent on Medicaid, it would have gone to compensate doctors and medical personnel for their services and that income, in turn, could have been spent on consumer goods and services. Had the money been spent on corrections, it would have purchased goods and services, as well as paid wages to individuals associated with the corrections system who, in turn, could have spent money in the Michigan economy. Had the revenue been foregone through a reduction in business taxes or income taxes, affected taxpayers would have realized an increase in their after-tax income, which could have been spent on additional goods and services. Recognizing these trade-offs is sometimes termed a "balanced-budget" analysis, because it recognizes that the funds for tax reductions or spending increases have an opportunity cost associated with them.

In fact, when the adjustment is made for credit-eligible expenses that do not contribute to Michigan economic activity, the loss to the State exceeds the gain to the private sector. Using the figures from the 2008 Annual Report, the State spent $43.6 million to generate $25.3 million in private sector benefit.


The larger problem, of course, is that such rent seeking is far from limited to the movie/TV business. Race-to-the-bottom competitions between states to lure businesses from each other is a big part of business in general now -- and a corresponding part of the fiscal crises facing states. In this wider scheme of things, movie production subsidies are small (but growing!) fish and the sector-wide funding model is, relatively speaking, an improvement on the systemically corrupt and commonplace use of one-off deals to lure individual big businesses to states, such as the $102 million shakedown of New Jersey by Panasonic to ensure that it didn't move its regional offices to Brooklyn. (Instead it used the money to move within New Jersey from Secaucus to Newark -- which is a wash at the state level but not if you live in Secaucus.) Let's not even start on the subject of sports teams and stadiums.

A systematic solution is clearly needed here. The movie subsidies are bad economic policy, but so are other uses of the tax system to favor individual businesses or narrow sectors. In his account of movie subsidy programs, Luther references an old paper on 'the economic war between the states' by Melvin Burstein and Arthur Rolnick, both at the Minneapolis Fed in the 1990s. Here's how they put it:

...there is a role for competition among states when it takes the form of a general tax and spend policy. Such competition leads states to provide a more efficient allocation of public and private goods. But when that competition takes the form of preferential treatment for specific businesses, not only is it not "admirable," it interferes with interstate commerce and undermines the national economic union by misallocating resources and causing states to provide too few public goods.

Because the states won't unilaterally disarm, the solution has to come from above. Burstein and Rolnick see such a role in Congress' power to regulate interstate commerce:

To implement a legislative prohibition, Congress could impose sanctions such as taxing imputed income, denying tax-exempt status to public debt used to compete for businesses and impounding federal funds payable to states engaging in such competition.

In other words, you can pay Panasonic to stay, Chris Christie, but it will come at a high price in federal dollars. Same deal for Snooki. The larger principle here is simple: no immiseration of the states through special deals for powerful, connected businesses. Maybe this is something the Tea Party and Occupy Wall Street can agree on.