Tuesday, April 19, 2011

Why Do State and Local Governments Continue to Give Welfare Checks to Corporations and Millionaires?

In the LA Times, Michael Kinsley laments the growing practice of state and local governments fighting each other tooth and nail to give tax abatements (read: "subsidies," or even "corporate welfare checks") to TV and movie production companies who make shows or films in their jurisdictions:
New Mexico under [Governor Bill] Richardson was a pioneer in this field. In 2002, it began offering a credit of 15% — later raised to 25% — toward the cost of making a movie in New Mexico (not counting star salaries and the mite paid to writers). Now, 42 states have followed its lead. New York has gone as high as 30%. These credits are generally transferable, savable and usable for other things, so it's no problem if the particular movie doesn't make money.

In less than a decade, the absurd notion of welfare for movie producers has evolved from the kind of weird thing they do in France to an unshakable American tradition. "I'm proud that New Mexico has been a leader in this effort," Richardson says.
Richardson says that the film and TV subsidy has brought "nearly $4 billion into our economy over eight years" and has created 10,000 jobs. By "our," he means New Mexico. He says every state should emulate this success. 
I find it bizarrely un-American to brag about and compete for cutting the largest corporate welfare checks to a particular industry.

Kinsley goes on to point out that much of these subsidies are pure waste, since many of the movies would have been made in New Mexico anyway, and that many of the numbers used to "justify" doling out these welfare checks are probably bogus:
But of course every state cannot do that because it essentially is a "beggar thy neighbor" strategy. Some of the movies that have been bribed to locate in New Mexico would have been made in New Mexico anyway. That part of the subsidy is a total waste. Most of the movies that have come to New Mexico for the subsidy would otherwise have been made in other states. New Mexicans may not care if the citizens of those states lose out, but inevitably those other states respond with subsidies of their own and New Mexico gets beggared along with everybody else.

In any event, Richardson's statistical claims are suspect, to say the least. He would not win an Oscarfor math. He says that 10,000 jobs and $4 billion "are huge numbers for a state with a population of only about 2.1 million." You can say that again. If Richardson's figures were correct — if every state had a similar program and every program achieved the same alleged success on a per capita basis — that would mean film subsidies would be adding $600 billion to the economy over eight years and would create 1.5 million jobs. Given that the entire movie production and distribution industry generates about $55 billion a year, it seems unlikely that this subsidy alone generates $75 billion a year (one-eighth of $600 billion) in new business. Similarly, it's hard to see how the subsidy could add 1.5 million jobs to an industry that employs, according to the Bureau of Labor Statistics, about 362,000 people.
I fancy myself a scholar, so whenever a controversy like this arises, I always ask, "what do the data say?"

The research is not completely conclusive, but much evidence exists that suggests that much of this kind of corporate welfare (usually called "tax abatements" by policy people and scholars) goes to projects that would have been located in a particular jurisdiction anyway, regardless of the abatement. A separate literature review concludes much the same.

In fact, if you think about tax abatements in economic terms, it is impossible for tax abatements to be worth the money they cost.

If we think of a simple model of a simple town (CorporateWelfareVille), let's assume that in the long run, taxes paid = services consumed, for both people and businesses, i.e. that both people and businesses receive in services the exact value of taxes they pay (hey, this is just a simple model, after all).

The purpose of a tax abatement is to get a business (say, MovieMasters) to locate in CorporateWelfareVille that would otherwise not have located there, meaning that in absence of the tax abatement, it is more profitable for MovieMasters to locate somewhere else. With the tax abatement, however, it is more profitable for MovieMasters to locate in CorporateWelfareVille, since it is receiving more services than it's paying for, while conversely, CorporateWelfareVille is providing more services than it's receiving in tax revenue.

You should see where this is headed.

As soon as the tax abatement expires, MovieMasters should relocate to the jurisdiction in which it's most profitable to operate, which we assume is not CorporateWelfareVille. If MovieMasters stays in CorporateWelfareVille after the tax abatement expires, then that demonstrates that the tax abatement wasn't necessary to attract MovieMasters to locate there in the first place.

Therefore, from the town's perspective, it is economically rational to never grant tax abatements at all, since they do not change the long-run outcome of MovieMasters's decisions. I realize the real world is more complicated and politicized than this, but at its core, this kind of corporate welfare is an unsustainable, dumb policy.

P.S. Washington, D.C. is apparently having a similar (but not identical) debate over allowing Wal-Mart into D.C., though the debate in D.C. revolves not around direct tax subsidies, but all of the indirect tax subsidies local jurisdictions tend to give Wal-Mart (such as providing health care to Wal-Mart's underpaid associates).

No comments:

Post a Comment