Is the Hobbit a Public Good? If no, why am I paying for it with taxpayer $$?

Hard on the heels of the story about why states are broke comes another example in the ongoing parade of horribles that is the global film tax incentive race to the bottom. Is the Hobbit a public good? If not, it's hard to understand why New Zealand gave its producers $120 million and changed its labor laws to prevent collective-bargaining, among other moves designed to keep production in New Zealand. This is a film that is expected to generate $3 billion in proceeds: they obviously don't require subsidies or labor suppression efforts in order to turn a profit. 

How many steps lie between the denial of labor rights in New Zealand to the appalling conditions and loss of life in Bangladesh? Not many. And why should a state ever be involved in driving its people down that road to serfdom?

Joe Karagnis has an account of the subsidies and legal reforms: To save regular earth, kill Hobbit subsidies. He says:

Film money is the hottest of hot investment money, fast in and fast out. Production is very mobile, and studios have become adept at extracting subsidies from governments for a few trinkets and promises of jobs.

Translation: film production acts just like capital. Countries (and states) compete for it, and it flows to the most welcome jurisdiction. That probably means tax incentives though there are lots of reasons to believe tax incentives aren't enough--investors need rule of law, good physical and financial infrastructure, competent workforce, etc. Really, what companies want is:

• a highly educated workforce
• that can't organize or demand high wages
• a well organized legal system that protects contracts and property rights
• but only (or mainly) of multinationals
• a well-organized financial system that protects the investment from currency/inflationary etc pressures
• but only if multinationals don't have to support it with taxes

Karagnis demonstrates the global spread of the problem: 

in the US ... state and local subsidies rocketed from US$2m in 2003 to about US$1.5b in 2012. Film subsidies are epidemic in Europe, where countries compete to attract and retain productions. And it has been a major part of New Zealand's cultural and industrial policy, where more than US$400m has been invested in The Lord of the Rings, Avatar and a handful of other productions over the past decade. 

But competitive subsidies are the quintessential sucker's game, in which winning is losing.

And a part of the story I just don't get at all:

For keeping Warner Bros happy, Prime Minister John Key - a former Merrill Lynch currency trader - got a replica magic Hobbit sword from President Obama...

This is puzzling and ridiculous (not to mention kind of embarrassing on both sides). The race to the bottom in film incentives is just another form of offshoring. Of course, it spreads US culture which is apparently viewed by someone that matters as the more important objective. My view: it is well past time for a little austerity for the film industry.

Why Are States Broke? Lobbying Hollows out the Tax Core

Over at Naked Capitalism, a lengthy discussion about that $80 billion in state-level corporate welfare from David Segal:

Our states and localities are cannibalizing one another as they concoct targeted tax breaks which they use to lure corporations from their neighbors. Meanwhile, a bevy of middlemen wet their beaks by helping corporations pit sucker states off of one another and brokering deals to sell the tax credits that comprise much of the ensuing largess. 

...It's the most basic of game theory dilemmas, and in a less corrupt political dynamic, one that could be solved by the intervention of sensible federal government actors, or perhaps even through the initiation of an interstate compact that had states agree to stop poaching from one another. 

Segal offers up Boeing as an example of the more successful manipulators ("Washington State residents bested a couple dozen other states, offering to pay the hometown company $3 billion not to forsake them" but South Carolina eventually won when it "offered Boeing around $1 billion to open a Dreamliner plant there.") Segal says only the WTO has "threatened to provide any sort of meaningful check" on these subsidies.

He also singles out one of my favorite targets, the infamous and ludicrous state film tax incentive war:

Perhaps the most transparently absurd manifestation of war-between-the-states phenomenon is the case of the film tax credit ... [which] spurred the most precipitous race to the bottom I've witnessed in my time in politics. It came to a head in 2009, when Wisconsin had just spent $100,000 dollars to support Johnny Depp's personal grooming expenses and Connecticut was fixing to subsidize episodes of Jerry Springer's talk show — lots of broken chairs to pay for.  ... California's recent budget includes a half-billion in tax credits of its own ... to keep Hollywood from off-shoring to Manhattan, Indianapolis, and Santa Fe, which are offering bribes of their own. ... At least 42 states now provide incentives, with some exceeding 40% of production costs.

That battle is lost, I think, and state-to-state is only compounded internationally. Hello Quebec, I'm looking at you, boasting about your "most advantageous cash rebates available in North America"--with your 25 % cash-back on all expenses, your 20 % bonus on all CGI and Green screen shots and no minimum spend, no caps; you don't even have to release the film in Quebec. Paradise.

Segal's got the analysis right:

all that we're doing is paying people to move jobs to-and-fro, creating no new social value, and reducing net public benefit.

WHen you do that among the several states it seems merely silly; when you do it among countries, however, that's a bit of a different matter now isn't it.

He also explains the mechanisms of the film tax credit and concludes that

tax credits of this form are always a raw deal for the public, unless a substantial percentage of the credits go unclaimed: A full 25% or so of the subsidy is misfiring, going to middlemen and corporations with significant tax burdens. If you want to fund something efficiently, just fork over cash. (This, of course, could never be made to happen, since then the public would understand that all we're really doing is forking over cash to millionaires.)

Well said. More at the link.