This article originally appeared in The Federalist
Netflix subscribers who have been binge-watching the new season’s “House of Cards” need to send their gratitude to Maryland taxpayers. In a real-life drama that could be straight out of a “House of Cards” scene, the show’s producers have been binging on Maryland taxpayers’ money, while schmoozing and extorting legislators whenever necessary.
Maryland offers a fully refundable tax credit that covers up to 25 percent of film production costs incurred in Maryland. For television series, this increases to 27 percent. For the credits to apply, at least half of the principal photography must take place in Maryland, and in-state productions costs must exceed $500,000.
In 2013, two television series, “House of Cards” and HBO’s “VEEP,” took all of Maryland’s credits. Maryland’s film production tax credit program is not designed to help small, local filmmakers—it is meant to subsidize rich Hollywood producers.
Since Maryland’s program was updated in 2012, $62.5 million in credits have been authorized. Of this total, 97 percent has been awarded to “VEEP” ($22.7 million) and “House of Cards” ($37.6 million).
Proponents of film tax credits argue that productions boost employment, promote tourism, and increase tax revenue. These claims are all false. In reality, film tax credits only help a small slice of the economy at the expense of most taxpayers.
Tax credits are more valuable than deductions because, while deductions lower taxable income, credits directly reduce tax bills. When these credits are refundable, as they are in Maryland, states actually pay production companies the difference if the tax liabilities are lower than the amount of the credit. As stated on The Maryland Film Office’s website, “If the tax credit allowed in any taxable year exceeds the total tax otherwise payable by the qualified film production entity for that taxable year, the qualified film production entity may claim a refund in the amount of excess.”
Qualified film production activities are also exempt from sales and use taxes. This has led to foregone revenues in Maryland alone totaling $17.8 million since 2001, including $4.0 million in 2013 and $3.7 million in 2014.
Total Maryland film tax credits are supposed to be capped at $7.5 million, but for fiscal year 2014, this cap was temporarily increased to $25 million. This $25 million is more than the business tax credits given to cybersecurity, wineries, biotechnology, job creation, and research and development—combined.
Last year, “VEEP” received $7.4 million for filming season four, and “House of Cards” was given $11.5 million to film season three, below the $14.4 million it received for season two. Of this $11.5 million, $7.5 million came from additional grants outside of the film production tax credit. This extra subsidy was gifted because Media Rights Capital, the production company behind “House of Cards,” threated to pack up and leave the state if it was not showered with more taxpayer dollars. Former Gov. Martin O’Malley negotiated the increase after a series of masterful manipulations seemingly inspired by the show’s main character, Frank Underwood.
Media Rights Capital’s first move was to delay the start of production for season three until June 2014—long enough to see if the tax credit cap is raised. Charles Goldstein, a senior vice president for Media Rights Capital, threatened O’Malley in a letter, which blatantly stated, “In the event sufficient incentives do not become available, we will have to break down our stage, sets and offices and set up in another state.”
Maryland House Speaker Michael E. Busch received a similar letter. The hostile tone of these not-so-veiled threats discomforted a number of state legislators. In response, Delegate William Frick introduced an amendment that would seize Media Right Capital’s property under eminent domain if production left the state. His inspiration? “I literally thought: What is an appropriate Frank Underwood response to a threat like this? Eminent domain really struck me as the most dramatic response.”
Media Rights Capital’s next move, which showed slightly more tact, was to send actor Kevin Spacey, who plays Underwood in the series, to a wine bar in Annapolis to schmooze with members of the Maryland General Assembly. Politicians eagerly snapped selfies with the two-time Academy Award-winner—showing that film tax credits certainly do serve to provide lawmakers with opportunities to rub elbows with Hollywood stars.
Though Maryland could not pass another increase in film subsidies in time, $7.5 million in other grants were approved, and the show continued. Apparently Spacey is just as scheming in real life as Underwood is in the show. He must have been recalling his famous line from Season One, “It’s so refreshing to work with someone who’ll throw a saddle on a gift horse rather than look it in the mouth.”
Interest groups consistently claim that film tax credits pay for themselves. The Maryland Film Industry Coalition, which is “dedicated to improving the business conditions for the film industry in Maryland,” funded a study which found that every dollar granted in film tax credits leads to $1.03 in tax revenues and $3.69 in economic output.
Film industry groups claiming imaginary benefits to targeted tax credits are nothing new, but they remain pure fantasy. Every independent study of film tax credits has found that they are not effective at creating permanent jobs or economic development. Data from several states find movie production incentives generate less than 30 cents for every lost dollar in tax revenue.
For example, the Maryland Department of Legislative Services came to a slightly different conclusion than did the Maryland Film Industry Coalition. In an October 2014 report, it found that the state’s film tax credit program led to negative long-term outcomes that actually decreased jobs, lowered personal incomes, and slowed GDP growth. For every dollar granted in film tax credits, Maryland receives only 6 cents back—meaning the program is a drain on the budget that, contrary to what the film industry argues, does not pay for itself.
The Department of Legislative Services report stated, “Since the credit does not provide sustainable economic development and provides a small return on investment to the State and local governments, DLS recommends that the General Assembly allow the film production activity tax credit to sunset as scheduled on July 1, 2016. Going forward, DLS recommends that the General Assembly focus economic development efforts on incentives that create permanent and lasting employment, rather than temporary jobs.”
States that choose to enter the competitive arena of film tax credits are set up for losing battles. Unless they continually increase their incentives, film companies will simply pack up and move to states offering sweeter deals, as shown by Media Rights Capital’s threats.
Another claimed benefit of film tax credit programs is increased tourism. Although a popular film or television show could theoretically boost tourism, it is puzzling what, if any, tourism benefit Maryland gains from subsidizing two television series that are set it Washington DC.
Positive effects of film tax credits only tell half the story. State lawmakers could attract almost any industry if they paid for a quarter to a third of its expenditures, but such a policy would be fiscally unsustainable. Balanced budget requirements mean that states must cut spending or raise taxes to pay for these special privileges granted to the film industry. Most people would agree that fixing potholes and staffing fire departments are better uses of tax money than subsidizing HBO, Media Rights Capital, and other film production companies.
Subsidizing Hollywood producers is neither fair nor smart economic policy. Frank Underwood can be a very cunning man, but instead of bending over backwards to keep the show, legislators should realize that working to create a real life “House of Cards” is not the best use of taxpayers’ money.
Jared Meyer is a fellow at Economics21 at the Manhattan Institute for Policy Research. You can follow him on Twitter @JaredMeyer10
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