Iron Man on Welfare? A Q&A on North Carolina's Film Incentives

In mid-July the John Locke Foundation, a free-market think-tank based in North Carolina, issued a scathing report on the state of the state's film incentives program, the expiration date for which was recently pushed to 2015.

The group, which counts Americans for Prosperity Director Art Pope among its directors and investors, describes itself as "an independent, non-profit think tank that would work 'for truth, for freedom, and for the future of North Carolina.'" Their most recent victory was helping to support a piece of legislation that bars the state from considering what they call unreliable predictions of rising sea levels when making policy.

In the July report by its Director of Regulatory Studies Jon Sanders, the John Locke Foundation claimed that the film incentive program is an expensive and complicated delivery system for "good old-fashioned corporate welfare" and that it costs the state more in tax incentives than it generates in revenue.

As one might expect from a free-market group, the Locke Foundation favors across-the-board tax breaks to focused incentives that they say create a favored class of industries and don't necessarily create a broad base of economic growth.

Sanders joined ComicBook.com to discuss the Locke Foundation's position on the state's incentive program, of which Iron Man 3 is the largest-ever beneficiary and which, if it remains in effect, will reportedly continue to pour money into Marvel Studios projects for years to come.

Next week, we'll have a representative from the North Carolina Film Office to discuss what they perceive as the benefits of the controversial incentive program.

The report issued by your organization argues, in a nutshell, that the benefits the state enjoys from attracting film productions such as the currently-filming Iron Man 3 pale in comparison to the kinds of benefits the state would enjoy if they suspended that program and cut taxes for industry across the board, is that a fair statement?

The report notes that a narrowly-tailored economic incentive, such as the film incentive, lowers taxes and regulations on the one industry, resulting in more production in that one sector. By keeping the tax and regulatory burden higher on the rest of the state's businesses and industries, however, all that is accomplished at best is a shifting of production away from those sectors into the one. Lowering taxes and regulations across the board would bring about more production across the board. It would shift production away from other states, as well as from the government sector.

How competitive would your proposed, 2% across-the-board tax cuts make North Carolina, in relation to other states with heavy incentives?

On that point the report cites findings in a May 2011 report by the Beacon Hill Institute at Suffolk University. On the point of economic competitiveness in general, the Tax Foundation ranks North Carolina's business tax climate as 44th in the nation and the worst by far in the South. North Carolina's rankings in personal income tax (43rd), retail sales tax (47th), and corporate income tax (29th) are nothing to boast about. North Carolina has one of the worst unemployment rates in the nation. Data released this week show that North Carolina lost nearly 5,000 construction, mining, and logging jobs over the last year. North Carolina leaders show through economic incentives programs that they recognize that lowering taxes and regulations would bring industry in; the report argues for a broad incentive of lower taxes and regulations across the board, rather than one narrowly tailored for a specific industry.

How likely would it be to get overall taxes lowered by 2%, as you suggest?

It would depend upon political leadership and will. To be clear, the suggestion wasn't mine; I cited the Beacon Hill Institute research, which used their N.C. State Tax Analysis Modeling Program to calculate: 1) letting North Carolina's temporary, one-cent state sales tax and income tax surcharges to expire, 2) lowering the corporate tax rate by 2 percentage points, and 3) changing how North Carolina calculates personal income taxes. That study is available at the John Locke Foundation web site, johnlocke.org. In my companion study on North Carolina cronyism, I argue for getting rid of the corporate income tax entirely as it is a major tool for cronyism used by politicians and state officials to dole out special favors and pick market winners and losers. My colleague Dr. Roy Cordato shows in our Agenda 2012 book (johnlocke.org/agenda2012) how the corporate income tax imposes a second and third level of taxation on personal income and amounts to a negative slush fund.

If that happened, how likely would it be that the legislature would drop the film incentives on top of that 2 percent? Won't the cronyism just continue?

As mentioned in the report, the film incentives were just extended for a year in deal-cutting to override the governor's veto of a measure allowing shale gas exploration and hydraulic fracturing in North Carolina.

What are some other areas or industries in the state that would benefit significantly from the rescinding of film incentives and reduction of overall taxes?

I cannot think of industries suffering from lower taxes and regulations. Because production companies benefit from incentives geared specifically for them, they would bear a cost others wouldn't if those incentives stopped. Of course, those production companies playing the incentives game pitting one state against another would not suffer much in the way of opportunity cost.

While your report raises the issue that North Carolina was an attractive destination for productions long before the incentive program was begun, how do you combat the fact that a number of other states and territories have similar programs in place. What’s to stop the producers from taking their show on the road to Georgia or Canada?

The report cites numerous amenities highlighted by North Carolina film offices that the state offers, which would still be in force regardless of the film incentives, and which would be heightened by a better overall business climate. Your question presumes that other states and territories' programs aren't subject to change. What's to stop them from increasing theirs? At what point do states decide to abandon this race to the bottom? Well, in fact, several are, and some surprising states are beginning to question theirs, including Georgia and Louisiana.

The jury is still out on whether or not these things actually generate revenue for the states. I’ve seen reports—not specific to North Carolina, but generally have seen reports—that lean both ways on the question, and none from anybody who doesn’t appear to have an agenda going in. What’s the bottom line in terms of why you guys are convinced the system doesn’t work?

Simple economics. People making decisions with their own resources are better at it than well-meaning government officials deliberating over how to allocate resources taken from other people. Incentives programs move resources away from productive uses into politically favored uses — if they were aligned, the economic incentive would already be in place without politicians having to act.

If the incentives were rescinded by the state legislature, the representatives will surely spend the money on something else. They aren't going to let the extra money lie around. how confident would you be that the legislature would spend that money on something that would provide a better ROI than the film incentives?

Given the rapid increase in state spending per person in North Carolina (at a record high in 2012, adjusted for inflation), I would hope that legislators would adopt a taxpayer bill of rights (TABOR) amendment and a priority-based budgeting approach to direct state spending to core functions of government.

Even assuming that the government isn’t seeing direct return on its investment, you’re taking a position that’s bound to be unpopular: should the program be defunded, some people—the number is impossible to predict—will lose their jobs in North Carolina. What do you say to critics who claim now is not the time for legislation that will cost North Carolinians their jobs?

The catch-all incentive I am pushing would result in net greater job creation, more new and permanent jobs, and greater investment in this state through allowing all businesses small and large to keep and direct more of their resources and spend fewer man-hours complying with state regulations. North Carolina's high unemployment situation, high tax rates, and low business climate ranking needs bold action.

Obviously, as a comic book news website, we mostly see things like Iron Man 3 and the planned Captain America sequel and Guardians of the Galaxy as the things we’re covering. Your report raises a very good point that tourism is fickle when it comes to these productions, but does that make it unpredictable?

Essentially.

What I mean by the question above is: A Good Old-Fashioned Orgy was never going to drive the kind of general interest from the public that a movie like Iron Man 3, with the potential to drive $1 billion in global revenue, will. That seems as important a distinction as the free rider problem, doesn’t it?

An interesting example, given that the taxpayers of North Carolina involuntarily committed nearly five times more money in tax credits for "A Good Old-Fashioned Orgy" than American viewers voluntarily gave it in at the box office. Nevertheless, I'm inclined to believe that the interest in superhero action movies is focused on the superhero and special effects, not the settings, which I think most viewers generally regard as generic backdrops.

The part of the program that issues “refunds” if the tax credits exceed the production’s tax liability seems just absolutely insane to a lot of people. Even assuming that it isn’t easy to end, or dramatically reduce, the program, what is it that keeps that clause from being excised the next time this comes up for debate in 2014?

Nothing but politics.

Removing the refund portion of the incentives: What would that do, in terms of the numbers? Would it make the overall program acceptable, if the across-the-board cuts were off the table?

A significant portion of the credits winds up being "refunded"; that is, given as direct payments. Ending that aspect of the program would change the cost structure to many production companies and would cause some of the ones gaming the system to choose their next most generous option. Incentives backers would likely object to that. It would also put to rest concerns that the refunds are unconstitutional (money drawn from the state treasury must be done by appropriation, needing a specific rather than open-ended amount approved by the legislature). The economic problems of it as a narrowly targeted incentive would persist.

0comments

From the outside, it’s hard not to see this as an extension of other issues. Republican governors have been trying to cut these programs and Democratic governors have been trying to reinstate or increase them, per your own report. Certainly Hollywood is no great friend of the Right. Is there anything you can say to persuade those of us without a horse in this race that it’s not about the Left supporting their friends and the Right trying to cut them off at the knees?

The report did not portray the issue as partisan nor depict it as breaking along party lines. It discusses how Minnesota Gov. Tim Pawlenty (R) sought to end his state's program and how his successor, Gov. Mark Dayton (DFL) restored it. It also notes, however, that the Republican-led General Assembly of North Carolina extended the film incentives program. It quotes a Republican legislator who favors the incentives. It mentions that the Republican governor of Pennsylvania, Tom Corbett, preserved his state's program from budget cuts. The report lists five states as having added to or solidified their incentives program; those interested in the partisan aspect would find that all five of those states have Republican governors. This report is part of the Carolina Cronyism series because I view the incentives as cronyism, a problem afflicting both parties in power to the detriment of the people. The benefits of the broad incentive of lower taxes and regulations I push for would accrue to businesses and individuals regardless of party affiliation.