Tracking the Cultural Exception, Part Four: A Double-Edged Sword

Americans generally think of subsidies to audiovisual industries like film and television as a foreign phenomenon. Yet that is hardly the case. In fact, one common argument for cultural exceptions made in other countries is that they are the best way to counter massive U.S. subsidies.

European film producers have a point, but they’re pursuing a wrongheaded approach. Rather, they have much to gain from negotiations, as U.S. subsidies would be on the table as well. As I noted in a previous post, the outdated policies actually harm the industries they’re meant to protect. And efforts to keep them in place help keep other distortionary policies in place. In the case of U.S. film subsidies, they could be said to be protected by the European exception.

There’s a reason Hollywood is king. At the federal level, the first $15 million spent on a film or television production can be deducted from taxes. And, as the map below shows, state-level incentives are growing every day. Needless to say, a lot of this could be easily reduced—and by greater levels than on the European side, since American negotiators have other priorities.

A reduction in these subsidies would help Americans, too. Tax incentives—the preferred tool for U.S. aid to starving movie moguls—are no boon for their patrons. Subsidy advocates claim that they can help kick start a new film industry in their states. But the job gains are fleeting because most movie-making talent is highly mobile and the market is already quite saturated. In fact, subsidies often make it easier to bring talent out to filming sites, which may reduce the number of local hires, as it’s easier to use already trained insiders. And strong unions in the film industry make local hiring even more difficult. Research suggests that some subsidized projects would have taken place without the subsidies. Furthermore, the subsidies keep growing, as states compete to attract film production projects. This internal trade war is a losing game, too. No one can win when everyone keeps upping the ante. Italian city-states used to compete in a similar way—funding art to prove how wealthy they were compared to their neighbors. But U.S. states have no business undertaking such policies when most are struggling to balance their budgets each year.

Finally, state-level subsidies are especially counterproductive because they are way too ambitious. Many subsidized productions don’t even earn enough to use the full tax refund they’re offered—but some generous state legislatures credit them nearly the full amount anyway. Regardless of whether these companies are producing anything of value, or even pretending to help the state, they get a chunk of change.

If there were an award for the worst policy, it would go to Massachusetts. Here companies are able to transfer their refunds to other corporations, regardless of their line of business. This has led to financial companies buying up tax refunds and saving massively on taxes. As the Center on Budget Policy and Priorities pointed out in 2010:

Through the end of fiscal year 2009, insurance companies had purchased about half of all transferred Massachusetts film tax credits, for example, and other financial institutions had purchased about a quarter of them.

Not exactly the best way to help taxpayers who then have to pick up the slack—and don’t even have jobs to show for it. These policies are so entrenched and so popular with wealthy film producers and bank CEOs that dislodging them is bound to prove politically difficult domestically. So if France wants easier competition with Hollywood, it should push for wasteful U.S. subsidies to be placed on the table. It would be doing a favor for U.S. taxpayers, as well as its own.