Opinion: Free Market Minute

Film Industry Flim-Flam

A new twist to motion-pictures

Raise your hand if you watch TV. Keep it up. OK, now raise your hand if you watch“Dawson’s Creek” or “One Tree Hill,” especially because they were filmed in North Carolina. And finally, raise your other hand (if you have any left) if you know that the producers of “One Tree Hill” are threatening to leave the state, and move their production setup out of Wilmington, North Carolina, if the state and city combined don’t cough up some rebates, tax breaks, and income and sales tax exemptions tout de suite.

North Carolina reportedly garnered a paltry $209 million in direct spending from the film industry in 2003. This is down from $230 million in 2002, and down sharply from a high of $320 million in the late ’90s. The City of Wilmington saw revenues drop from $52 million to about $33 million from 2002 to 2003. City managers are worried that the infrastructure Wilmington has amassed—a 45-acre film studio, technicians, costume, equipment, and service companies—will simply leave. They are probably correct, and they are being played for “best friend” status along with cities like Vancouver and Austin, locations in Louisiana, and sites in Eastern Europe. By May, your favorite homegrown TV series could be grown somewhere else, if the producers can get a better, sweeter deal in a more attractive back yard.

If you watch a lot of TV, you should already understand the basic problem with bribes. ‘Bribees’ rarely stay bribed for long. Sometimes it’s a little “incentive” at first, with demands escalating over time in order to keep the bribed party, in this case a Screen Gems production company in Wilmington, from bolting to a better deal elsewhere. You’ve seen the Sopranos; you know how it works.

The newer, bolder model is to demand the entire bundle of goodies up front; tax exemptions, tax breaks, free land, etc. This is an advantage for bribees because they don’t have to invest much in non-portable assets, as the migration of dozens of technicians and peripheral industry workers out of Wilmington demonstrates. The TV and film industry, in fact, has combined two economic “models”—nomadic ‘hit and run’ and politically sanctioned rent-seeking—into a money making exercise that has little if anything to do with film or TV.

Rent-seeking occurs when a firm tries to gain concessions and benefits in one location, say Wilmington, that are higher than the value of production in their next best alternative location. Since Screen Gems will have to give up earnings and possible concessions in Austin or Vancouver, it is earning economic rents if the Wilmington deal is more lucrative than either of these choices. Demanding the land, exemptions, and rebates up front minimizes the cost of leaving if the grass gets greener elsewhere, thus the nomadic component of the film industry. Screen Gems and other film production companies are also creating a new kind of migrant worker in the U.S., the film production techie.

What are the costs and benefits of attracting companies with tax breaks, when they can pick up and leave virtually overnight? Since gross spending by the companies attracted to North Carolina is offset by the lost opportunities and dollar value of the “incentives” deal, net benefits in terms of employment and incomes are difficult to calculate.

In a market setting, entertainment projects must find backers who are willing to bet that a production will succeed. The profit and loss motive keeps both sides in check. A North Carolina “investment” in the film industry has no profit-loss motive because the taxpayers that bankroll the incentives have no control over the process, film companies have no obligation to taxpayers if projects fail, and politicians can either take credit or dodge responsibility, depending on the outcome.

Nobel laureate Milton Friedman noted that it is far easier to spend someone else’s money than it is to spend your own. Tax dollars spent on highly mobile film production companies, in a highly unpredictable industry, are risky ventures that taxpayers should be allowed to refuse to bankroll.