NPRI: Film tax credit bill a loser for taxpayers

  • Thursday, February 21, 2013

CARSON CITY — Today, before the Senate Revenue and Economic Development Committee, Geoffrey Lawrence, NPRI’s deputy policy director, delivered the following testimony on SB 165, a bill that would establish transferable film tax credits.

NPRI generally opposes special tax credits, abatements or exemptions for favored industries. These special breaks bias the marketplace — impinging on taxpayers to reward firms or industries with political influence. Every dollar that is awarded through a special tax credit is a dollar that is unavailable to finance public services. As a result, taxpayers with less influence must bear a heavier burden in order to finance those services.

The argument of proponents centers around the notion that these tax credits are necessary to lure targeted firms into Nevada and that the prospective tax revenues that would otherwise be paid by these firms wouldn’t exist if not for the tax credits that lure them here. However, tax scholars from both the political Right and the political Left have regularly criticized this argument.

For example, the Tax Foundation, looking specifically at state film tax credits, concludes:

“Film tax credits fail to live up to their promises to encourage economic growth overall and to raise tax revenue. States claim these incentives create jobs, but the jobs created are mostly temporary positions, often transplanted from other states. Furthermore, the competition among states transfers a large portion of potential gains to the movie industry, not to local businesses or state coffers.”

State film tax credits began gaining widespread popularity in the mid-2000s. The nationwide total of these credits grew from $3 million in 2000 to $1.4 billion by 2010. What have we learned from this track record? The promises of the film industry have largely proven false and the warnings of tax economists have proven correct.

Louisiana’s non-partisan Legislative Fiscal Office, for instance has examined the fiscal impact of the state’s film tax program and concluded that the claims of film tax credit advocates are overblown. The Fiscal Office analysis shows that the program creates a net loss for the state’s budget even after accounting for all multiplier effects and additional employment created by the film industry. The net fiscal effect was an annual net loss for the state budget of more than $48,000,000 annually in every year between 2006 and 2011. The Office’s chief economist concluded:

“After accounting for the dynamic effects on the economy of the additional film and video production activity, the State may expect to recoup 16 percent to 18 percent of the tax revenue it obligates to the program through the transferable tax credit mechanism.”

That’s why states with film tax credits have recently begun to repeal these programs. In 2010, a record 44 states had these programs. Since then, eight states have ended their programs, including Arizona, Arkansas, Idaho, Iowa, Kansas, Maine, New Jersey and Washington. Other states have scaled back their programs or placed caps on their use. These include Alaska, Connecticut, Georgia, Hawaii, Michigan, Missouri, Rhode Island, Wisconsin and even the much-vaunted New Mexico.

These programs have been rolled back because most of the benefits have accrued to the film industry while they have generated few long-term benefits to local economies.

The current proposal, however, is even worse than most other states’ film tax credits, because it would award more in credits than the amount of tax liability that filmmakers would face. Further, the credit would be transferable, meaning that filmmakers can sell these credits on a secondary market to individuals who have nothing to do with the film industry. As a result, they would be able to essentially use Nevada taxpayers as an ATM machine to withdraw credits and then sell them on the secondary market.

This is not just theoretical. Late last year, film producer Danny Bigel launched a new market exchange for monetizable state tax incentives called the Online Incentives Exchange. The Exchange claims to be the “first truly national, transparent, liquid exchange for the trading of state tax credits.” The Exchange — which is outside the regulatory oversight of the SEC — reports that the market for transferable state tax credits exceeds $5 billion annually. At the moment, the Exchange primarily trades credits awarded by Louisiana, California and Georgia. But make no mistake, Nevada would soon be added to this list if it creates a transferable tax credit. That would mean Nevada taxpayer money being passed around by traders far outside of our state.

I’d like to quote the Center on Budget and Policy Priorities — a left-wing think tank in Washington, D.C. with which NPRI is typically in disagreement. Still, they’ve concluded:

“When a state grants a tax credit that is larger than the tax that is actually due, then it's essentially making an equity investment in the business. The state, which is to say, all other taxpayers, should reap the upside of that investment. It shouldn't be captured by the seller of the credit, the buyer, or a middleman. A transparent market for transferable tax credits is all well and good, but that doesn't change the fact that the state isn't benefiting when it should.”

If Nevada policymakers want to promote economic development and job creation in the Silver State, there is a path available to them. It includes removing the barriers imposed on native entrepreneurs by state and local governments. The Brookings Institution has pointed out that less than 2 percent of new job creation results from the cross-state movement of firms, but 57 percent results from the launch of new enterprises by native, small-time entrepreneurs.

NPRI recently outlined a plan to simplify this path to entrepreneurship for Nevadans by streamlining the state’s regulatory structures, filing requirements and labor-market strictures. The report includes very specific recommendations, including an aggressive expansion of the state business portal.

Special tax credits for film or other industries with political pull, however, is not the path to sustainable economic development.

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