Mar 16, 2009 14 Comments ›› Pat Dollard
Tax Me If You Can
We’re constantly told that taxes don’t matter to business and investors, but listen to that noted supply-side economist, Alec Baldwin. The actor recently rebuked New York Governor David Paterson for threatening to try to help close the state’s $7 billion budget deficit by canceling a 35% tax credit for films shot in the Big Apple.
“I’m telling you right now,” Mr. Baldwin declared, “if these tax breaks are not reinstated into the budget, film production in this town is going to collapse, and television is going to collapse and it’s all going to go to California.” Well, well. Apparently taxes do matter, at least when it comes to filming “30 Rock” in Manhattan.
Believe it or not, Mr. Baldwin’s views are shared across the movie industry, which is pleading in state capitals across the country for most-favored-tax status. Hollywood productions are highly mobile and can film just about anywhere. So they have taken to shopping around the country — and the world — for the most lucrative tax avoidance deal.
According to the Motion Picture Association of America, nearly 40 states have corporate tax carve outs or generous cash rebates to lure movie studios to their states. In Michigan, producers negotiated a 40% tax credit on their production costs. A bipartisan bill introduced in the Texas legislature last week and supported by Governor Rick Perry would allocate $60 million into the Texas Film Incentive Program. Members of the Screen Actors Guild held a rally last week in front of the state capitol urging the tax breaks.
In some cases these state tax credits exceed a company’s tax liabilities, which means that Disney, Dreamworks and others can get a net cash subsidy from state taxpayers. “In many states, today, movie producers actually pay a negative tax,” says a Tax Foundation report on the subject.
The Hollywood studios are ruthless profit maximizers and are expert at playing state suitors against one another. In the midst of California’s recent $42 billion budget showdown, producers threatened to leave the state if the legislature didn’t offer more inducements. So lawmakers in Sacramento gave the industry a new $250 million deal to stay put.
The film “Annapolis,” about the Naval Academy, was supposed to be shot in Maryland, but producers negotiated a better offer in Pennsylvania shortly before filming was set to begin. So they packed the trucks and drove up the interstate to save $10 million on their taxes. A film based on the John Grisham novel, “The Runaway Jury,” is set in Mississippi but filmed in Louisiana thanks to tax incentives.
Of course, this is the same Hollywood film industry whose members fund causes and candidates that favor raising taxes on everyone else. The Motion Picture Production and Distribution industry last year gave $14 million in political contributions: 89% went to pro-tax Democrats. A few years ago, director Rob Reiner funded a successful California initiative to raise the state income tax rate to more than 10%. Unlike a film shoot, which can relocate on a moment’s notice, your average small businessman in Encino is stuck paying the highest tax rate in the country — at least until he gives up and moves to Reno.
We’ve got nothing against industries trying to reduce their tax liability. Shareholders expect nothing less. When we asked the Motion Picture Association to justify these tax breaks, a spokesman gladly pointed to studies showing that the industry is creating thousands of jobs and hundreds of millions of dollars of new investment in the likes of Michigan and New York. Fair enough. This is called “dynamic analysis.” The movie industry’s tax machinations are irrefutable evidence that low tax rates do affect business decisions.
As a general principle, however, states shouldn’t chase smoke stacks or film production crews with specific tax breaks. It makes much more sense for cities, states and the federal government to lower tax rates for everyone. New York City can survive without Alec Baldwin and “30 Rock,” but it can’t function without the thousands of small businesses that pay taxes without the benefit of lobbyists and loopholes.