Opinion: Daily Journal

Time to Send Film Incentives to Sunset Boulevard

North Carolina’s film tax credits are currently slated to expire at the close of 2014. Accuracy requires use of the word “currently” to underscore the fluidity of the situation.

After all, the last expiration date for the tax credits was used as a bargaining chip to gain the necessary votes to override Gov. Bev Perdue’s veto of a bill that set in motion the process to allow oil and gas exploration in North Carolina by horizontal drilling and hydraulic fracturing. Rep. Susi Hamilton, D-New Hanover, was a key vote in favor of the override, for which she reportedly got the tax credits’ sunset pushed back a year.

The industry has for months been campaigning for extending the credits again. The potential future sunset is already hurting filming in the state. Of course, the same was said about the mere appearance of a bill that would have ended just the refundability of the tax credits and allowed them to roll over for up to five years.

Most other states offer film incentives, too. Production companies could just pack up and go elsewhere, if the price here isn’t right. Many other countries have their own incentives as well. Just as importantly, these are all moving targets, as film industry lobbyists continually pit one state’s incentives structure against another.

Most but not all: A handful of states have gotten out of the film incentives business, and others never got in. My 2012 report discussed several states in the process of rethinking their incentives for film productions. The October update from The Incentives Office at Ease Entertainment Services helpfully shows “Who Has Money Left?
Here is the current disposition of who’s not in the game:

  • Wisconsin’s program just ended as of July 1 (2013)
  • Kansas’ program ended as of Dec. 31, 2012 — after having been reinstated in 2011 following suspension in 2009-10
  • Iowa’s has been terminated (it had been suspended in 2009 after discovery of widespread fraud and abuse)
  • Indiana’s sunsetted in 2012
  • Arizona’s sunsetted in 2010
  • Missouri’s is slated to sunset on Nov. 28 (2013)
  • New Jersey’s is slated to sunset in 2015
  • Connecticut’s has been placed on a two-year hiatus
  • Idaho’s hasn’t received any appropriations since 2010
  • The District of Columbia’s is also not funded
  • Delaware has no program
  • Nebraska has no program
  • New Hampshire has no program
  • North Dakota has no program
  • South Dakota has no program

There are several reasons to think now is the time to allow the credits to sunset for good.

1. Refundability is likely unconstitutional, but the industry says ending refundability would effectively gut the incentives.
As the North Carolina Institute for Constitutional Law has explained, the refundability provision is likely unconstitutional since it is an open-ended draw on the state Treasury without appropriation by the General Assembly.

If the incentives’ effectiveness really hinges on repeatedly breaking state law, then they need to go.

2. Film incentives don’t work like other incentives.
As Brent Lane of the Kenan Institute at the University of North Carolina at Chapel Hill pointed out, the refundability provision is unique among the state’s economic incentives. “We’re paying out a lot of cash directly to the film industry, rather than — as we do in all our other tax credits — forcing the company to gradually use their tax credit over future years,” Lane told WFAE.

Also unlike other economic incentive programs, film credits don’t require specific numbers of jobs created or other long-term promises from the recipients.

3. Film incentives don’t work, like other incentives.
As this newsletter has previously discussed, “Studies in state after state after state after state (including North Carolina) find that film tax credits are net money losers for the host state.” Which puts them in the tradition of other economic incentives programs.

Based on the questionable assumption that state policymakers are more capable than investors taking risks with their own capital to pick the best business ventures, economic incentives programs tend to be money losers on net, though they have positive effects on the favored industry.

4. We’re engaged in a race to the bottom.
As mentioned above, other states and even other nations are constantly jostling to outbid film productions by offering the biggest “Slice of the Pie!” The previously cited Incentives Office claims to “help producers maximize their tax incentives or rebates by taking over the entire incentives process, from choosing the state, filing the application, tracking the project, preparing the final application, and getting the money!” (It’s probably coincidence that incentives-takers punctuate like excitable middle-school girls.)

This aspect is what The Economist termed a “beggar-thy-neighbor trade war (with mutually destructive tariffs)” and, in the headline, “a stupid trend.”

5. North Carolina’s corporate income tax rate has been cut, while the amenities N.C. offers filmmakers (beyond the incentives) are still in place.
Incentives programs show that lower taxes attract industries — they are aimed at politically favored industries. Among other things, North Carolina’s sweeping tax reforms this year cut the corporate income tax rate, making the state a more attractive place for industries of all kinds, not just film productions.

The state remains a right-to-work state with a pleasant climate, a range of natural features, experienced crews, and good infrastructure. If all that still isn’t enough to win film productions without paying them directly to film here, that can’t be a strong argument for keeping the tax credits active.

Stripped of all the rhetoric, the issue is essentially this: whether the people of North Carolina, given a full understanding of the trade-offs involved, would wish to keep paying film production companies for the vanity of saying North Carolina is the home of such famous productions as “Homeland,” “Sleepy Hollow,” “Under the Dome,” and “Iron Man 3.”

Jon Sanders (@jonpsanders) is Director of Regulatory Studies for the John Locke Foundation.