Update 3/9/12: The bill was “pulled” from Ways and Means last night and passed the House 92-6. The official term is that Ways and Means was “relieved of consideration” of the bill. I believe this particular subsidy is similar to the way the economics of the NBA works and voted no, but clearly a majority of legislators disagree with me.
I have received a lot of calls and e-mails from people about the Film Credit bill (SB 5539), as we do with any expiring tax credit or preference. The film industry is important to the state’s economy and to both the Spokane and Seattle areas in particular. We obviously want to do everything we can to encourage growth, however the structure of this particular credit has some issues.
The credit works as follows:
- Companies get a 100% B&O tax credit for donations they make to a non-profit organization, reducing state tax revenues.
- The non-profit in question can then subsidize film and commercial productions for up to 1/3 of the cost of production for their film or commercial.
In essence, taxpayers in Washington are paying out of state companies to do work in Washington. It’s one thing to give someone a reduced tax rate, but in this case it is a direct subsidy of commercial work. In deciding if a tax break is doing its job you have to look at what your alternatives are for spending the money. We could provide a much cheaper tax incentive to a wide variety of industries, or we could use the money to educate children (employing teachers, for example). In comparison to other incentives, this one is very, very expensive for the benefits received.
Film production credits have been critiqued by both progressive and conservative leaning think tanks. The Tax Foundation (the people who bring you “tax freedom day”) found that most film production jobs are either temporary or imported from other states, noting “When evaluating job creation, legislators should acknowledge that some jobs might be destroyed in the creation of film production jobs.” (Page 8, http://www.taxfoundation.org/files/sr173.pdf )
Progressive leaning groups have also weighed in against film credits. The Center on Budget and Policy Priorities concluded “State film subsidies are a wasteful, ineffective, and unfair instrument of economic development. While they appear to be a “quick fix” that provides jobs and business to state residents with only a short lag, in reality they benefit mostly non-residents, especially well-paid non-resident film and TV professionals.” (Conclusion, http://www.cbpp.org/cms/index.cfm?fa=view&id=3326 )
Because of the unique nature of Washington’s B&O tax, very little tax revenue is paid to the state from Hollywood movie studios. In its 2010 review of the film production tax incentive, The Joint Legislative Audit and Review Committee found that from 2007-2009 the film industry generated $36 million in direct economic activity and $36 million in induced economic activity; however only $873,000 in sales tax revenue was generated during the same time period. (An effective sales tax rate of 1.14% compared to the state sales tax rate of 6.5%). Rental of equipment for film production also enjoys its own sales and use tax credit. (RCW 82.08.315)
In general, the Washington State constitution enjoins the state from directly subsidizing businesses. This credit uses a unique mechanism to get around this prohibition in law, but not in spirit.