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Horror Film: Loophole Subverts Film Tax Credit Program

film tax credit

By, Lowman S. Henry
Chairman & CEO of the Lincoln Institute and host of the weekly Lincoln Radio Journal

Every survey or study of state-by-state economic competitiveness puts Pennsylvania in the bottom third when it comes to the tax and regulatory policies that comprise a state’s business climate. Rather than reform those policies to make Penn’s Woods more competitive, officials have attempted to spur economic development through tax credits and other incentives awarded to specific businesses.

This policy of having government pick winners and losers has been an abject failure. After decades of what amounts to corporate welfare handed out to well-connected businesses, the needle has not moved on the state’s standing relative to the 49 other states in economic competitiveness.

Despite this bipartisan alliance of governors, lawmakers and deep state bureaucrats stubbornly resist ending these handouts and replacing them with tax and regulatory policies that would provide an across-the-board boost to all businesses regardless of size or political connections.

A prime example of such government waste is the film tax credit program. It was initiated by Governor Ed Rendell in 2007 when $75 million was inserted into the state budget in what he touted as an effort to get production companies to bring more high-dollar projects to Pennsylvania. Under the scheme, production companies can get a tax credit of up to 25% of costs if at least 60% of those expenditures occur within the commonwealth.

Aside from the obvious absurdity of having state taxpayers subsidize highly profitable out-of-state film-makers, it turns out production companies are not actually using the credit, but are “selling” them to other businesses in exchange for cash.

State Representative Dawn Keefer (R-York/Cumberland) has shone the spotlight on this boondoggle after she learned recipients of the film tax credit have sold about 99% of the credits to other companies. Those companies, says Keefer, have nothing to do with the film industry “showing the true financial incentive for the production is the greater gain to be had by selling the credits to large corporations and paying the Pennsylvania assessed taxes.”

In fact, the practice is so prolific that there actually are secondary tax brokers who make large fees by guiding the deals that transfer the tax credits from film production companies to other corporations. “At the end of the day,” says Keefer, “the production companies (many of them in town for only a short season) get cash, large corporations avoid paying taxes and PA taxpayers subsidize business the government deemed most worthy with no substantial benefit to the state’s economy.”

Keefer has proposed legislation that would disallow the sale of these tax credits going forward. That would force production companies to utilize the tax credits themselves, fulfilling the intent of the legislation that initially set up the program.

There are several additional layers of reform that need to be addressed. First, the film tax credit program needs to be ended. It originated as a gift to Governor Ed Rendell’s Hollywood friends and survives because certain lawmakers from both parties continue to conspire to keep the tax credit intact.

Second, there is an overarching policy issue, and that is the need for the entirety of state government to finally admit that the practice of picking winners and losers has failed to make Pennsylvania even reasonably competitive among other states.

High taxes and over-regulation discourage businesses from expanding or locating here and no amount of tax credits or other targeted incentives is ever going to change that equation. This is especially true as other states do enact such reforms, thus improving their economic climates and making Penn’s Woods even more economically uncompetitive.

Pennsylvania has benefitted from the roaring Trump economy, but not to the extent it should, because our state-level policies are holding us back. It will take leadership and a total change in the mindset of policymakers, but until we make those changes we will never be, as former Governor Tom Ridge often said, “a leader among states and a competitor among nations.”