Commentary

Film Incentives Don’t Generate Economic Development

Incentives are a poor use of resources

A weekend column in the Detroit Free Press covered the efforts of the Michigan Film Industry Association to reinstitute taxpayer subsidies for movie and other productions. The state wasted more than $400 million before pulling the plug on the last film incentive. Most scholarly research finds state economic development — or, specifically, corporate and industrial welfare incentives — to be ineffective and often very expensive.

In April, the peer-reviewed Journal of Contemporary Economic Policy will publish a new study on film incentives by economics professor John Charles Bradbury of Kennesaw State University in Georgia. That study, titled, “Do Movie Production Incentives Generate Economic Development?,” looked at whether film tax credits had a positive effect on the economic well-being of states that used them from 2000 to 2015.

He finds that they do not. His research does “indicate that the film industry may be bolstered by movie production incentives, similar to other studies; however, any gains do not spillover into the overall economy.”

That the film industry may benefit from tax or subsidy advantages conferred upon it by state bureaucrats is no surprise. After all, if my neighbor’s wealth is forcibly transferred to me, I’d be better off too. But that doesn’t mean our community’s economic well-being would improve on net balance. Yet people in the film industry promote their subsidies based on a similar logic.

“Films and those behind them buy locally to support a broad range of needs from lumber yards to build sets, to hotels and rental cars,” Michael Anderson told the Detroit Free Press. Anderson, a stagehand and vice chair of the film association, continued. “They can buy locally for props and set dressings. Crews are fed from the local grocery stores. Restaurants and bars benefit.” That may be true, but with state-subsidized film productions, there is a cost side of the equation that must be borne by others too, and the employment and net effect may not be positive.

Professor Bradbury’s review of existing literature on film incentives is a damning indictment of such programs. He cites a 2018 study that “finds incentives to be associated with little to no increase in film industry employment …” (though perhaps a temporary wage boost); a 2017 study found some employment growth in California and New York, but “there was no discernable increase in aggregate employment across states.” Another study found that “for 2013 … the return on investment from every state movie production incentive program was negative, with average return per dollar of tax credit issued being 27 cents.”

The policy conclusions drawn in this paper and other research are unambiguous, in the author’s view. “In total,” he writes, “the findings do not support the economic development justification often used to promote state subsidies to the film industry.” He warns that states expend considerable resources in the hope of encouraging growth through this program. He cites Georgia, specifically, which is often held up as an example of success, such as in last weekend’s Free Press column.

Bradbury notes that in 2018, Georgia approved some $800 million tax credits for film production — equal to 3% of the state’s own-source budget revenues. He concludes:

If the incentives do not have the intended development effects on the industry or wider economy, then film incentives represent a policy that has been widely defused in spite of evidence that film subsidies are a poor use of resources.

Indeed, film and other incentives are a poor use of resources, particularly when you consider the opportunity costs involved. There is simply no reason to reinstitute an ineffective and costly tax credit or subsidy program when there is so much other vital work to be done. The money would be better spent repairing Michigan roads and bridges than offering yet another subsidy sop to yet another private, for-profit industry.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.

Commentary

Giving Public Dollars To Private Interests Violates The Public Interest

So ruled Michigan’s most famous jurist back in 1871

Michigan’s lawmakers are considering a bill to authorize $300 million more in economic development spending. The potential success of this spending relies on several assumptions. From what its supporters have claimed, here is the case for it:

  • There are opportunities for the state government to give out selective tax treatment or subsidies to some companies that will result in an outsized economic impact.
  • These business projects have spillover benefits to the people not receiving these favors, which creates a general improvement in the economy that benefits everyone.
  • These handouts are necessary to change business decisions — without them, none of these business projects would happen.
  • Other states will lure companies away if Michigan doesn’t make a competitive offer, so the state will lose all of these benefits if the handouts are not available.

There is good reason to question these assumptions. But there is a different way to think about this issue, and, believe it or not, it comes from an 1871 Michigan Supreme Court decision by Chief Justice Thomas Cooley about the corporate handouts of his day: railroad subsidies.

Cooley argued that taxes levied on the public have inherent limitations, including that they be spent only on public purposes. Using tax money to generate private benefits for a select group — even if they have economic consequences that ripple out beyond them — is against the public interest and unjustified.

His court opinion held:

  • For taxes to be legitimate, they need to be apportioned and distributed fairly, and spent for the public interest, which is broadly defined.
  • But even under a broad definition of the public interest, taxes may not be spent for someone’s direct private interest.
  • It is the private sector’s role to provide the benefits of private enterprise, and those benefits serve the public without requiring public funds.

He understood the temptation to subsidize private interests that seem like they serve the public good. He argued that even if spillover benefits exist, however, governments should pass on the opportunity:

The opening of a new street in a city or village may be of trifling public importance as compared with the location within it of some new business or manufacture; but while the right to pay out the public funds for the one would be unquestionable, the other by common consent is classified as a private interest, which the public can aid as individuals if they see fit, while they are not permitted to employ the machinery of the government to that end.

The people in the community can invest in a new business if they see the benefits, but they should not use government powers to force everyone to. Taxation meant for the public good can’t serve private benefits first with only secondary benefits for the public, no matter how large the purported economic spinoff effects.

There is more to his argument and readers can check it out here. It provides an alternative way of understanding the intersection between private interests and the public good, which happens to undermine beliefs about how corporate handouts can enhance the public good.

Our lawmakers are the people who determine the public interest and enact state policy. They have repeatedly endorsed the intellectual framework that allows the state to transfer tax money meant for the public good to private interests. They ought to consider another.

Michigan Capitol Confidential is the news source produced by the Mackinac Center for Public Policy. Michigan Capitol Confidential reports with a free-market news perspective.