Film Industry Tax Incentive Race to the Bottom Continues

by on January 30, 2014 · 0 comments

The war among the states to see who can lavish the film industry with more generous tax credits in their attempt to become “the next Hollywood” continues, and it is quickly descending into a classic race to the bottom. A front-page article in today’s Wall Street Journal notes that the tax incentive bidding war has gotten so intense that it is hollowing out the old Hollywood labor pool and sending it on a road trip across the America in search of tax-induced job activity:

As film and TV production scatters around the country, more workers…  are packing up from California and moving to where the jobs are. Driving this exodus of lower-wage workers — stunt doubles, makeup artists, production assistants and others who keep movie sets humming — are successful efforts by a host of states to use tax incentives to poach production business from California. [...] 

Only two movies with production budgets higher than $100 million filmed in Los Angeles in 2013, according to Film L.A. Inc., the city’s movie office. In 1997, the year “Titanic” was released, every big-budget film but one filmed at least partially in the city. The number of feature-film production days in Los Angeles peaked in 1996 and fell by 50% through last year, according to Film L.A. Projects such as reality television and student films have picked up some of the slack. But overall entertainment-industry employment has slid. About 120,000 Californians worked in the industry in 2012, down from 136,000 in 2004, according to the U.S. Bureau of Labor Statistics.

The labor migration has arisen in part because California hasn’t competed aggressively on the tax-break front, officials and executives say, while states like Georgia have made efforts to grab a sizable chunk of the industry. More than 40 states and 30 foreign countries are offering increasingly generous and creative tax incentives to lure entertainment producers.

On one hand, hooray for labor mobility! But seriously, this stinks because this labor shift is taking place in a wholly unnatural way, with a complex and growing web of tax inducements leading to massive distortions in this marketplace. While proponents will insist these programs are job creators for the communities that win, in reality, they are really just job reshufflers that net limited jobs at that. Meanwhile, the costs to their taxpayers grows as more and more state and local governments jump in this game. It’s classic “smokestack chasing” activity, except in this case the firms probably didn’t even create that many jobs while they were there and then you don’t even have a factory left when the firms leave town!

If things continue like this, it probably won’t be long before some “innovative” state or local government leader gets the idea of actually just paying some film producers cold hard cash to come set up shop in their area. Hey, at least that way the programs would be on-budget and nominally more accountable!

Anyway, I’ve documented the cost of this ruinous race to the bottom in my essay, “State Film Industry Incentives: A Growing Cronyism Fiasco,” which documents the economic evidence about just how inefficient these programs are in practice.  I later expanded that essay and included in my massive paper with Brent Skorup, “A History of Cronyism and Capture in the Information Technology Sector.” Warning: It makes for miserable reading if you care about fiscal accountability and good government. Maybe somebody will make a movie about this racket someday! (But don’t hold your breath.)
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P.S. For more on the corrupting influence of cronyism on American capitalism, please visit this Mercatus Center page for a comprehensive set of studies on the issue. Also, check out this outstanding paper by my colleague Matt Mitchell (“The Pathology of Privilege: The Economic Consequences of Government Favoritism“) and this excellent recent book on cronyism by Randall G. Holcombe and Andrea Castillo. And here’s a little slide show I put together on the costs of cronyism.

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