by Richard Lorenc
Illinois is in rough shape, but it’s not difficult to see how it happened. The pursuit of well-meaning but misguided policies over many years have lead us into a situation where the politicians see no other choice but to borrow huge sums of money to pay the government’s overdue bills. As if that weren’t bad enough, legislators recently increased the state personal income tax by 67 percent and the corporate income tax by 46 percent.
Every policy move our government makes has both short and long-term effects, and the effect of these policies will drive families and businesses (like Caterpillar) out of Illinois.
For legislators who may recognize the error of their ways, there’s an opportunity this week to make a small step toward fiscal sanity: they should eliminate the state’s film tax credit.
The film tax credit works like this: If a studio spends a certain amount of money in Illinois, the state will send it a check for up to 45 percent of expenses. From 2006 to 2008, Illinois taxpayers paid $39 million to film studios that shot footage in the state.
Collin Corbett took to these pages today in defense of the credit, arguing that it has allowed several high-profile movies and television pilots to be shot in Chicago, and that the industry has created thousands of jobs and new investment in the state. For these reasons, he calls the film tax credit “moderately effective.”
I would go two steps further and argue it has been not only counterproductive, but that it is an example of a misguided policy that transfers wealth from Illinois taxpayers to pay for things they may never want to buy or support.
The record of film tax credits is spotty at best. My former employer, the Illinois Policy Institute, issued a paper in September that casts doubt on the positive economic effects of film tax credits in which they noted:
A 2008 study of South Carolina’s film incentives program found it “returned 19 cents in taxes for each dollar paid out in rebates.” In Louisiana, the expected return for the state’s film tax incentive was 16-18 cents for each dollar paid out. Rhode Island fares a little better with “a 28-cent return on every dollar invested,” but Connecticut only gets eight cents.
Following the release of data that demonstrated Michigan’s generous tax credit program yielded “new economic activity [that] barely offset 10% of the cost of awarding film tax credits,” Governor Rick Snyder has proposed eliminating the program altogether (although, so far, only a cap on credits has been implemented).
After casting doubt on the economics of film tax credits, the Institute recommends a thorough cost-benefit analysis of Illinois’s tax credit program, something that has not yet been done. This means we don’t even know how many pennies on the dollar of the $39 million given to film studios has been reinvested in the Illinois economy.
Film credit supporters argue that incentivizing film studios with taxpayer cash has additional indirect benefits to the local economy well after a film is finished shooting. Mr. Corbett gives the example of Cinespace Chicago, an $80 million film studio that has said it will leave the state if the tax credit is not renewed. Given the cash they receive from taxpayers for their business operations, it would be understandable if you thought this sounded like blackmail. If they cannot run their business without money from Illinois taxpayers, they should ask themselves whether they have a sound business model.
Even if the film credit were to incentivize otherwise profitable businesses to Illinois, we must ask whether the resources used to provide both the subsidy and build these businesses would not have been better used for other purposes, as money in your child’s college savings account, for example. It is impossible to prove a counterfactual, but economists often compare what is seen to what is unseen.
The sole purpose of subsidies like the film tax credit is to make unprofitable goods or services profitable. Subsidies distort the basic information conveyed by prices, and allow consumers, producers, and even movie studios to make choices they might otherwise not have made because they were too expensive.
The film tax credit can be regarded as a symptom of our state’s problem with big government. Were it not for the high taxes, stifling regulatory environment, and anti-free market rhetoric coming from Springfield, Illinois would not need to give its people’s money away to lure studios. They would come because our state is a wonderful place to shoot footage and because it was truly affordable to do so. Reality as it is, however, the tax credit hasn’t been evaluated, and it’s highly unlikely an analysis would lend economic support for its continuation.
The Illinois film tax credit is yet another example of our state’s counterproductive economic policies. It is wasteful and wrong and should be eliminated entirely without further delay.
Richard Lorenc is cofounder of Liberty Markets LLC, a Chicago-based firm that connects donors with entrepreneurial, free market nonprofits, and the chairman of the Chicago chapter of America’s Future Foundation.
