Governments Should Stop Funding Corporations: Some advocate the government using tax dollars to help the broadcast industry

Job creation should occur in a free society naturally, without it happening because one sector is favored by the government over another. Anything else, I believe, constitutes government planning, a superfluous, and usually expensive, intrusion into the economy.

And, in the ashes of modern socialist societies—as well as some capitalist societies that adopted some socialist methods—we have often seen the disastrous results of governments trying to plan economies. It is a futile exercise of politicians trying to pick winners and losers, akin to the average losing horse player who is sure the next bet will finally be a winner.

Recently I examined these issues in a story for the New York Post on tax credits for the movie/television industry. The issue is this: Should your state, province, city or central government take taxpayer dollars and give it to favored industries or businesses in the form of lower taxes?

Job! Jobs! Jobs!

Many governments are today often led by men and women who constantly say they want to create “jobs, jobs, jobs” through tax breaks for the favored few. The latter are the ones who are effective at lobbying them, not necessarily the best business people. They then presumably pass on the benefits of bigger payrolls to the rest of us.

However, many argue it is bad deal for taxpayers. They say movie/television tax breaks are a wasteful use of state taxpayer dollars.

Why?

Tax credits for one industry are given at the expense of other industries that don’t enjoy tax reductions. A better approach, critics say, is to reduce everyone’s tax bill.

That’s not what our lawmakers believe here in the Empire State.

Here’s a Billion Bucks!

Indeed, after considerable lobbying, these lawmakers had New York taxpayers ante up some $1 billion in film and television tax credits in 2013-2014. This, supporters note, helped to generate some $5 billion in production and post-production work. The numbers are provided in a study for the state agency Empire State Development (ESD).

“In the ten years since the credit was implemented, employment in the film industry in New York State has increased by 50 percent, from 28,458 jobs to 42,564,” according to an ESD study, “Economic Impact of the Film Industry in New York State.”

One of the beneficiaries of the program contends the taxpayers are receiving good value.

“The credit is a very good deal for the state’s taxpayers,” says Stuart Suna, a co-owner of Silvercup Studios, which has two studios in Queens. It is also opening a third in Port Morris in the Bronx.

“Without the credit, we couldn’t have expanded,” Suna says. He argues the credits are very effective because the film industry—the same as the finance industry—is a critical part of the state’s economy. For every dollar of credits, Suna contends, the state receives more than a dollar in tax revenues.

Including Port Morris, Suna says some 2,300 people will be employed by the various organizations that use his studios. Silvercup would still be operating if the tax credit wasn’t offered, but jobs generated would be much fewer, Suna says.

The Best Use of Your Money?

But critics, such as Joseph Henchman, a policy analyst with the Tax Foundation, contend these programs are not effective. These credits, he said in a recent speech to a state legislature, are “a poor use of limited taxpayer dollars, because they are costly in the short-term and, in the long-term, are incapable of achieving the economic development goals their promoters often emphasize.”

So why do it?

It is because the rich like to get richer; a friendly government can help them do it. It is also human nature that, no matter how wealthy one is, almost everyone wants to be supported by the taxpayers.

Indeed, many big broadcasting operations take tax credits. Broadcast organizations from HBO to Netflix to Fox are using them. They employ hundreds and, in some cases, thousands of employees. They have produced shows here such as “Orange Is the New Black” and “Nurse Jackie.” These tax credit programs help New York effectively compete for film work with lower cost states, ESD says.

The Reason Why They’re Spending Your Money

The film tax credit, the study continued, “brings films and television productions in NYS (New York State) more in line with other location options and levels the playing field somewhat so that production in NY makes sense.”

One might ask, why does the state have such high costs? And why doesn’t New York just have lower taxes, then the film industry, along with all other industries, might look at New York as a reasonably priced place to conduct business. Still, many states haven’t seen it that way.

Many states, over the last decade, have offered film tax credits. These incentive programs grew from four states offering $2 million in 1999, to a peak of 40 states offering $1.4 billion in 2010, according to the Tax Foundation.

An ESD spokesman said that the film industry in New York started having problems early in the century when Louisiana initiated a movie tax credit program. Since New York’s program began in 2004, the program has expanded from 10 percent to 30 percent of eligible costs.

That means the program’s eligibility level expanded by 200 percent. As with so many other government programs, costs have nowhere to go but up. Relatively modest government programs’ costs almost always seem to explode, regardless of whether they are effective or not or which party is in power.

Credit eligible costs are some “below the line” costs. These include the salaries of blue collar workers providing technical and crew production services for companies. The companies make feature films, television series and pilots as well as television films. The film industry has been booming in New York since the credit began, the EDS spokesman added.

That may be true if one simply looks at the gross number of jobs without measuring how much each job costs the taxpayers.

Doubts Persist

Scott Drenkard, an economist with the Tax Foundation, said some states are now re-examining the so-called benefits of these tax breaks. Louisiana has just reduced its movie tax credits program while Michigan ended it.

“States are now looking at these programs with a new, healthy skepticism,” Drenkard said. He added state tax credit programs are now going in the opposite direction.

“In the past few years, however, a record number of states are reconsidering, re-evaluating, or even outright de-funding, their film incentive programs,” according to Drenkard.

However, California, citing the loss of jobs to New York, recently tripled its tax credits program. “Yes, it is taxpayer money,” said Governor Jerry Brown. “But it is going to build jobs for the future.”

Words of Wisdom

Nevertheless, Drenkard warns states that use the programs will inevitably end up in bidding wars in which every state will be hurt.

I agree. Where will it end and how much will taxpayers—most of whom don’t or will never work in the film industry—have to pay out to protect these jobs?

And it doesn’t end there. These tax incentive programs should lead to many questions.

Why do states and cities help pay some of the costs of professional sports teams? And why do cities and towns often own or operate transportation companies. What expertise do governments have in running or subsidizing any of these businesses? How can a government know where and how to spend taxpayer dollars in the private sector? How can it know which firms or industries should get tax credits and which shouldn’t? And why should any up and coming industry or business get any subsidies?

In answering the above questions, let us remember this: Governments have no special skills in running businesses or knowing which businesses should or should not receive tax credits. The best business people know how to make money. Government should neither hurt nor help anyone.

Get Yours

I found Stuart Suna of Silvercup Studios to be one of the most informed and decent people I spoke to in researching this story for the Post. He has made a fortune in building up Silvercup Studios. He also puts back much of it into the South Bronx, where I grew up. He has helped build middle income private homes in my own Bronx neighborhood, Highbridge. He has helped many people and is a philanthropist who I respect.

However, Suna also said something that clarified the debate over tax credits. I asked if it wasn’t unfair that most New York businesses and industries—especially small ones—don’t also receive credits. He told me that others should also go to Albany and make their case: His argument to other industries and businesses seems to be: Go to lobby lawmakers to give you credits so you’ll be able to hire more workers.

However, is that the kind of society we want?

Do We Want Business Politicized?

Do we want a society in which risk takers are rewarded not because they make a better product or service, but because they are good at lobbying lawmakers for taxpayers? And what about the latter? Isn’t he or she already paying enough without having to shell out more and more to help favored private interests?

Tax credits, for any industry, change the nature of business, whose greatest feature, at its best, is that it is apolitical. The business person who depends on tax credits is no longer the business person devoted exclusively to making a better product. Now his or her survival can hinge on the prejudices of pols; on political alliance instead of factors such as research and development.

That is a prescription for disaster.

About The Author

Gregory Bresiger

Gregory Bresiger is an independent business journalist from Queens, New York. His Personal Finance articles have appeared in publications such as The New York Post & Financial Advisor Magazine. He is the author of the eBooks “Personal Finance For People Who Hate Personal Finance” and “MoneySense”.