Hurray for Hollywood Tax Credits?

Is California’s political establishment trying to crush the Golden State’s economy and punish Hollywood movie moguls? That’s one interpretation of Governor Jerry Brown’s decision to sign a $330 million movie tax credit into law, but only if you take seriously the argument that tax increases—as opposed to tax credits—have driven the so-called California Renaissance. Recall how Brown, legislative leaders, and prominent columnists lauded voters’ approval of Proposition 30, which significantly raised sales and income taxes two years ago. The best businesses, they said, don’t mind California’s high tax burden so long as the weather stays nice. But if that’s so, then why the giveaway to Tinsel Town?

The Film and Television Job Creation and Retention Act more than triples the current $100 million-a-year movie tax credit for five years beginning in fiscal year 2015–16. The new law allows studios to use the credits for television pilots and eliminates a lottery system for selecting beneficiaries. It also removes the existing credit’s cap of $75 million on production budgets, according to a state senate analysis.

The California Teachers Association opposed the bill for self-interested reasons: the union doesn’t want any money potentially taken away from public schools, which currently eat up more than 40 percent of the state’s general fund. Despite the CTA’s opposition, the legislation enjoyed broad bipartisan support. Republicans usually argue that tax credits are much less important than a more favorable overall tax climate, but they agreed to these special credits, just as they supported tax credits for a proposed Tesla electric-car battery plant, which wound up going to Nevada. More unusual was the support from the otherwise tax-credit-averse Democrats. “This legislation will keep the cameras rolling in California and strengthen our position as the entertainment capital of the world,” claimed Kevin de Leon, a Los Angeles Democrat and new leader of the state senate. Governor Brown, who had criticized the credit in the past, said at the bill signing that SB 1839 “helps thousands of Californians—from stage hands and set designers to electricians and delivery drivers.” At least Democrats are tacitly recognizing the value of lower taxes—even if only for a handpicked industry that happens to support them.

But politicians’ assertions notwithstanding, the nonpartisan Legislative Analyst’s Office in April released a report questioning the effectiveness of the existing tax credit. The LAO argued that studies promoting the credit’s economic benefit “vastly overstate” its advantages: “A return of $0.65 in state tax (excluding unemployment insurance) revenue for each $1 in tax credits may or may not be a good return compared with other state programs. However, it is incomplete—and, arguably, not accurate—to claim that the tax credit program pays for itself.”

Tax-credit supporters point to the loss of 16,000 California film-industry jobs over an eight-year period and blame other states, such as New York, for offering large subsidies that are supposedly stealing away movie productions. Just because other states lavish subsidies on movie companies doesn’t make it a great economic idea. “The state government in New York has dished out well over $2.5 billion in film industry tax incentives since their program began in 2004,” noted Christopher Thornberg, founder of Beacon Economics in Los Angeles. “And for that payout, New York has ‘stolen’ a total of roughly 10,000 jobs from California . . . Do that math! New York has paid $250,000 for each new job.”

The LAO pointed out another flaw in the case for Hollywood giveaways: “Other industries—such as manufacturing or software development—also could become the target of aggressive state subsidies. If this were to occur, would California also provide subsidies to retain these businesses? Doing so could be prohibitively expensive. Instead of approaching economic policy on an industry-by-industry basis, the Legislature may take actions that encourage all businesses to stay or relocate to California, such as broad-based tax reductions or regulatory changes.”

Unfortunately, a political party addicted to taxing and regulating happens to control California’s legislature. It’s funny how Democrats can rationalize tax hikes on the one hand and tax credits on the other. Pulitzer Prize-winning writer David Cay Johnston mocked claims that higher taxes destroy jobs: “Some research into tax rates indicates that high tax rates have the opposite effect: People may work harder, trying to make more money to achieve a desired after-tax income and may slough off if tax rates are lowered.” In other words, high tax rates aren’t detrimental to the California economy—they may even be the cause of its recent growth.

Johnston’s pro-tax argument is popular in Sacramento. Recently, Senator Hannah-Beth Jackson, a Santa Barbara Democrat, argued in support of a bill that would base corporate tax rates on CEO compensation—with higher rates imposed on companies that pay executives more. Yet Jackson joined her colleagues (only two voted no in both houses) in supporting the Hollywood tax credits.

Tellingly, policymakers have been unwilling to consider less costly ways to encourage film production in the state. None of the discussions surrounding SB 1839, for instance, pointed to the pernicious effect of Hollywood’s union-dominated work rules. Think of the TMZ, or Thirty-Mile Zone, the radius the various movie and TV unions use to determine per diem rates and driving distances for crew members. Nor did any of the bill’s sponsors have a word to say about the creative accounting Hollywood studios employ to show profits and losses.

So even as they peddle the fiction that California is booming because of high tax rates, legislators feel compelled to subsidize one of the state’s signature industries. Maybe they should have raised taxes on Hollywood instead. After all, it would be good for the economy: the higher taxes would make the studios work harder.