Remember 1000 years ago when the Czar took on the task of reading the entire draft ObamaCare bill? He didn’t receive nearly as much email on that as he is on this subject of film tax subsidies. Amazed and MC have written back. Again. But obviously this is a more interesting topic than you or the Czar thinks, because there is quite a bit of passion here. Note, too, the similarity in the arguments. First up, let us commence with Amazed, as she led off the initial discussion. Amazed adds:

Oh wise one…….

With respect, MC makes the more cogent points here, methinks. Auto industry notwithstanding, in no other industry in the Midwest, that I’m aware of, does the State underwrite 42% of the industry’s customer base. In no other industry does the State say to customers “We’ll pay for 42% of your incoming business. Just yours, no one else’s.” The State does not underwrite 42% of my customer’s insurance premiums or 42% of the pizzas at the restaurant down the street, why are movies made by gazillionaires who live elsewhere so special? Why is that industry so much better than mine.

Sorry – if a Government has to pay customers with taxpayer money to shop at your establishment or make something in your factory, it’s not really that good an idea, is it? Can they do it for everyone? Just a bit unsustainable.

It’s a bit like when I was an elected local official and one of the economic development types came to us with a deal to subsidize one year of rent for a company from another town to come in and compete with existing businesses (underwriting their profits with taxpayer money on an uneven playing field, to strain a metaphor), we told him to “take a hike, Mike”.

We need a better plan. I know! Lower tax rates and regs for everybody who does business in our state to a level that would make it attractive for everyone to do business here. The winners and losers will pick themselves.

Ever so sincerely,
Amazed.

And here is MC’s addendum:

But how much did Real Steel spend in Michigan? That’s also in there: $48,898,189. The Czar is no GorT, but it looks like the net revenues for the State of Michigan are (48,898,189 – 18,400,189 = ) $30,498,000, or a net profit of $6.93 per resident.

This was net spending per resident, not net profit. Obviously in order to get that $30.5M in revenue the individual business had to spend some money. If we say there was a (generous?) 20% profit on the spending, that means there was about $6.1M of profit for a tax subsidy of $18.3M.

One would hope that the State got more than $18.3M back in other tax revenue (increased state business) as a result of investing $18.3M in the movie. Did it? Doubt we can really know, and I doubt that it did.

But again I say, why should the film industry be afforded special tax treatment just because others do it? Again, lower all taxes for all businesses, not just the “preferred” ones like the film industry! This is the point – why is the film industry deserving of tax breaks not offered to others? If I can come in and generate $6.1M of business profit for a tax subsidy of $18.3M, should I not also get this subsidy?

I am arguing the general question of offering specific tax breaks to specific industries, not whether this break was a “good thing” for the residents of Michigan for this particular film. One can easily pervert an economy with the power to arbitrarily tax or not tax, as our current experiment in green energy shows. Reducing taxes on film makers is just as arbitrary and just as perverting of the economy.

Once you decide to make these subsidies, where do you draw the line? Is there an objective way of determining which industry is worthy of subsidies and which isn’t?

At the risk of earning another decapitation, please answer this specifically.

After rereading the post I see you tried to answer with what might be considered objective criteria. Here’s why I’m on about this.

There is a figure from a 2009 study that indicates about $1.08 would be returned for $1 in tax abatements (subsidies). Like most such studies, I suspect the numbers are weak and have error bars extending well below $1 (negative return). Why choose the film industry? Abate all the taxes! Choose all the industries!

Say all the states abate taxes on the film industry roughly equally. Now you have a straight subsidy since they get the tax abatement regardless of where they go. How about going the other way, where they don’t get a tax break from anyone? Then they choose to film where it makes the most sense, not to get the better tax breaks.

Whew. Parts of those two emails practically sound each other, don’t they? Okay, in order in which they appear…and the Czar loathes this, because it looks like he’s short and rude with two very dear people, but he is quite unable to think of a better way of responding without spending another thirteen seconds of thought coming up with a better way. Here we go.

The State does not underwrite 42% of my customer’s insurance premiums or 42% of the pizzas at the restaurant down the street, why are movies made by gazillionaires who live elsewhere so special? Why is that industry so much better than mine.

Yikes, the Czar is nervous about people complaining about gazillionaires keeping their money. He will however get back to this shortly.

Sorry – if a Government has to pay customers with taxpayer money to shop at your establishment or make something in your factory, it’s not really that good an idea, is it? Can they do it for everyone? Just a bit unsustainable.

Here is the crux of it: the State did not pay anyone any money. They merely offered a tax credit, which has value, but does not transfer money to the recipient, as much as voluntarily not collecting it. An analogy here might be a store slashing its markup and passing the savings onto you in the form of a sale. Other shoppers are not necessarily paying for your savings; the store is merely absorbing the loss of profit into its general overhead.

Our argument, and the one that municipalities use all the time with TIFs, is that we would rather lose 5 years of revenues to gain 10 more, than see a property go 15 years without collecting a cent. A TIF, in that respect, is very much like a tax sale. It attracts buyers, so at least you make something rather than lose everything.

Lower tax rates and regs for everybody who does business in our state to a level that would make it attractive for everyone to do business here. The winners and losers will pick themselves.

No argument here! We love lower taxes. But we will return to that “winners and losers” concept in a moment.

No onto MC.

This was net spending per resident, not net profit.

The report we cited, which is the source of all the hullabaloo, states the following quite clearly in Exhibit A: Real Steel dumped $48,898,189 into local area businesses, including wages for 456 Michigan residents, moneys spent by non-Michigan residents, goods, services, and other expenditures. They are all broken out. The amount of money discounted from taxation was $18,400,189 and returned to the production as an incentive, minus $92,001 kept by the Michigan film office for their use. This means that the production company left almost $30.5 million in Michigan. In a business, that’s a profit that went to taxpayers, not to the state.

This is the point – why is the film industry deserving of tax breaks not offered to others? If I can come in and generate $6.1M of business profit for a tax subsidy of $18.3M, should I not also get this subsidy?

To your point, and to Amazed’s up above, many businesses qualify for subsidies. When a business is considering moving into a state, the state often offers a tax incentive to do so. When a business threatens leaving a state, the state offers them incentives to stay. The math is simple: the initial loss in revenues is offset by the increase in revenues in getting the business.

States, and other governments, are not businesses. That is something on which the three of us will agree. But states, and other governments, can do much to increase revenue without raising taxes. And making the states attractive to business is a sure-fire way to do it. Your linked story helps illustrate the Czar’s point: Nebraska rejects film subsidies, and is seeing potentially millions of dollars going to Kansas.

They are going to shoot the film somewhere. Location often does not matter; but if a state is willing to do business with a film company, or any company that could readily take signficant chunks of money elsewhere, they are welcome to consider it.

How about going the other way, where they don’t get a tax break from anyone? Then they choose to film where it makes the most sense, not to get the better tax breaks.

Works in theory. But you are on a slippery slope with that idea: if that analogy is spread to other areas of business, you see some fallacies pop up right away. Should stores all offer the same price on an item? Should stock prices be the same? Obviously not: you need things to attract customers and investors alike. That’s basically what these incentives are doing.

And we do know what happens when states refuse to offer subsidies across the board: the film productions all go to Vancouver. Today, only most go North. Incentives keep that money here in the states. And by the way, what they heck is wrong with states competing for business? That’s one of the things our founders wanted them to do! Tax incentives are a darn simple way for one state to compete against another without necessarily outlaying cash directly.

Two points the Czar really wants you both to consider:

1. Subsidies are not offered to the film industry: they are limited to specific production companies. Further, many businesses qualify for subsidies under similar circumstances. The state wants money and it wants jobs; if the states stopped competing with tax incentives, the money and jobs would drift to Canada: film productions, auto manufacturers, intermodal facilities—all examples of where that exactly happened at one point in time or another.
2. Both Amazed and MC are using the phrase “winners and losers.” That argument works against the federal government picking specific companies (specific TARP banks, General Motors, Solyndra, etc.), because there are clear winners and losers. But that’s a bailout: a direct investment or outlaying of cash. A tax incentive is not a direct outlay: it is a reduction in revenues collected. Who is the winner? The film production company and the Michigan businesses they utilized and the Michigan residents they employed. Who are the losers? The other residents? They made their money back, plus. The state? The incentives cost the state nothing. It is essential not to conflate a federal bailout with states competing against one another for business.

The Czar understands—and agrees—that lowering taxes would be a great incentive. He will do you one better: notice that Democrat politicians always want to raise taxes on evil corporations to kill their job-killing profiteering? Yet, whenever the Dems really need to fix unemployement, what’s the first thing they do? They lower corporate taxes.

The discussion we have had about subsidies is proof: lowering taxes boosts employment, and the Michigan film office data shows how much money can be generated by lowering taxes to the nearest dollar. Heck, forget the film industry! Rick Santorum has a fairly sensible plan to offer 100% federal subsidies on all manufacturing industries. If you are a manufacturer, that’s irresistible. No, it won’t shut down the factories in China, India, and Indonesia, but it will allow those same businesses to expand like crazy here in the US, hiring folks by the hundreds of thousands at least.

Is that picking a winner or a loser? You have to decide that for yourselves, dear readers.

The Czar of Muscovy

Божію Поспѣшествующею Милостію Мы, Дима Грозный Императоръ и Самодержецъ Всероссiйскiй, цѣсарь Московскiй. The Czar was born in the steppes of Russia in 1267, and was cheated out of total control of all Russia upon the death of Boris Mikhailovich, who replaced Alexander Yaroslav Nevsky in 1263. However, in 1283, our Czar was passed over due to a clerical error and the rule of all Russia went to his second cousin Daniil (Даниил Александрович), whom Czar still resents. As a half-hearted apology, the Czar was awarded control over Muscovy, inconveniently located 5,000 miles away just outside Chicago. He now spends his time seething about this and writing about other stuff that bothers him.