Less than a month after North Carolina legislators approved more money for the state’s film tax incentives program, a new John Locke Foundation Spotlight Report pans film incentives as a clear example of cronyism.
“The problem with these incentives is that the lower tax burden on film productions comes with the consequence of keeping tax burdens high on nonfavored businesses and industries,'” said report author Jon Sanders, JLF Director of Regulatory Studies. “When government chooses one industry or business for special deals and breaks, there’s a good chance that cronyism is at work.”
While detailing problems linked to film incentives, Sanders devotes another newly released Policy Report to the general problem of cronyism. Together, the two reports launch a new multipart series titled “Carolina Cronyism.”
“Cronyism is an umbrella term covering a host of government activities by which an industry or even a single firm or speculator is given favors and support they could not attain in market competition,” Sanders explained. “Examples include regulations that help favored businesses, laws that restrict new competitors from entering a market, government-sponsored cartels and monopolies, mandates requiring consumers to buy government-favored products, and tax breaks targeting specific businesses.”
State lawmakers added $60 million for film incentives in the final days of this year’s legislative session. Sanders’ report focuses on film incentives’ basic flaws.
“Before states began film tax incentives programs, North Carolina was a popular off-Hollywood destination for film crews,” Sanders said. “A right-to-work state with a pleasant climate and a range of natural features, North Carolina held significant advantages for movie makers.”
Targeted tax incentives changed the industry, especially when the number of states offering special breaks jumped from four to 44 from 2002 to 2009, Sanders said. North Carolina’s last major film incentive expansion came in 2009, after Georgia outbid the Tar Heel State for a Miley Cyrus movie.
“The biggest beneficiaries of film incentives are film production companies, while state film offices, local studios, film crew workers, restaurants, hotels, and pro-incentive politicians also stand to gain when a film production comes to town,” Sanders said. “Boosters also tout benefits for tourism, but tourism effects are fickle, unpredictable, and not very powerful.”
Many states are rethinking their film incentives, Sanders said. “Eight states ended, suspended, or stopped funding film incentives from 2009 to 2011,” he said. “Others either cut back incentives or considered ending them. States are making these cutbacks as several studies have found that film incentives return to state coffers mere pennies on the dollar spent.”
North Carolina’s refundable film tax credit causes a special concern, Sanders said. “If the film production company’s tax liability is smaller than the credit, the state writes the company a check for the difference,” he explained. “This is a classic example of corporate welfare. It’s been described as choosing movie stars over teachers.”
Film incentives show that lower taxes and less regulation attract industry, Sanders said. “Recent research shows that cutting taxes and regulation across the board — rather than just for the favored film industry — would provide a powerful stimulus for the state’s economy.”
North Carolina government has been doling out special breaks for favored industries for years, as Sanders demonstrates in the report dedicated to cronyism. “North Carolina’s recent history is littered with cronyism — with rewards, favoritism, use of politics for personal enrichment, and arbitrary doling out of tax revenues,” he said. “These policies damage good, strong, fair, and efficient government.”
Sanders’ dissection of the state’s cronyism problem features such characters as former N.C. House Speaker Jim Black and former Gov. Mike Easley, both convicted felons, along with controversial episodes involving the N.C. Education Lottery, the Currituck ferry, Randy Parton Theatre, N.C. Global TransPark, and state legislative slush funds.
Government mandates also attract Sanders’ attention, including laws targeting auto dealership locations, car insurance requirements, and state vehicle safety and emissions inspections. “Government mandates weigh on those forced to bear them, but they are a windfall for others who provide mandated services.”
Noting positive changes linked to recent state regulatory reform, Sanders outlines more broad-based ideas for lawmakers to consider.
“Make state spending fully transparent,” he said. “Make the processes of state governing open and transparent. Expand a 2011 reform of the state administrative appeals process for environmental agencies to apply to all agencies.”
“Strengthen the Rules Review Commission,” Sanders added. “Require cost-benefit analysis for all proposed regulations. Require a periodic review of existing state regulations. Implement small-business flexibility analysis to prevent regulations from running roughshod over small employers. Abolish the corporate income tax.”
Sanders plans to focus even more attention on cronyism in the months ahead. “Government does not bestow favoritism in a vacuum,” he said. “Its every policy and decision has economic costs, the more so when the policy interferes with or, worse, prevents some market choices. The reports in this series are intended to help chart a new direction for state government.”