12/01/2012 09:51 am ET Updated Jan 31, 2013

The Biz : The Silliness of State Tax Credits for Film Production

I may take a lot of heat for this one, but I am an American first, and an entertainment lawyer second, so let me state a secret fact from an entertainment industry insider: The state tax credits for film production are pure lunacy from a policy perspective. For those not familiar with this boondoggle, it is basically the states pandering after film production by handing out free money to anyone that will produce a film in their state, although the cost is always kept off the expenditure ledger through the back door of tax credits. But a tax credit is no less an expenditure than a direct payment of hard cash.

First, let's start with the concept that we stand by and watch runaway production to distant shores (or not so distant, in the case of Canada), and instead of competing as a unified country, we let the states squabble amongst each other, competing to see who can reach the lowest common denominator by giving the biggest tax subsidies for film production. States are in a race to the bottom in tax credit giveaways that are mind numbing in their generosity. The ugly truth is that the "beggar thy neighbor" competition among the states has led them to give away a lot more than they are getting, increasing their already massive deficits. We thus have a system where the states are competing against each other, driving them insolvent, rather than the country competing as a whole against the rest of the world.

Second, let's ponder whether anyone in government learned anything form the 2008 financial crisis as to whether the government should subsidize investment in a particular industry. Gee, we did that for housing loans and that worked out well...

And of all the things to subsidize -- films? Really? I like a good film as much as the next person, but the last time I looked, America was suffering from deteriorating education, slums, fiscal deficits, high medical costs, and hurricanes, to name a few. Maybe we should subsidize something a tad more important to the country than films.

But more important than all of that is the fiscal suicide that a state commits by subsidizing film production. The standard argument for it that is always rolled out is the "multiplier effect," which is the theory that if you give $1 million to subsidize film production, the net effect will be to encourage $10 million to be spent in the state. But even putting aside the fact that most film productions are carpet baggers that come and go, and that most of the $10 million will be paid to people that won't spend a dime in the state, much less pay taxes there, this argument overlooks the "divisor effect," which is that if you tax your local residents an additional $1 million (which is what the states are indirectly doing), then you are discouraging them (and other businesses contemplating moving there) to spend the same $10 million. This is a zero sum game, or you could grow any economy by just not imposing any taxes.

So what's the solution? Easy. It is time for all the states to band together, stop the self-defeating madness, and request the federal government to implement a tax credit for U.S. production costs. And it must be assignable in order to provide actual financing for production, which is what is really needed. As part of implementing this tax credit, the federal government should use its power under the Commerce Clause to preempt all state laws (and don't let Puerto Rico sneak away) that give tax credits for production. That way, the states would be saved from their self-inflicted immolation, and they could go back to competing for production based on services, infrastructure, and locations -- just like in the good ol' days. We could go back to seeing ads to shoot in Wyoming because of its sweeping vistas rather than ads for shooting in Connecticut because of its sweeping tax credits.

I thought that the Civil War resolved once and for all that America is one country, undivided, whose interest was of a unified national character, not a loose federation of wrangling fiefdoms. If we are going to seriously battle runaway production to foreign shores, than we better stand together, united, and adopt a national plan to counter this scourge. And the best plan to do that is a single federal tax credit that is assignable (to permit badly needed financing for production), or, barring that, that is at least refundable. But one way or the other, we better do something intelligent -- and soon -- before the states nibble themselves to death.