The Roundhouse in Santa Fe (Photo by Peter St. Cyr)
The recent legislative session contained several tough debates, including the film industry subsidy debate in which many legislators received hundreds of e-mails from New Mexico families impacted by this industry. As part of my due diligence as a legislator, and due to the large amount of tax dollars at stake, I examined this issue in depth to help me make informed decisions about related bills.
The center-right Tax Foundation analyzed film incentives nationwide and found these programs to be a poor investment of tax dollars. One interesting point made in this report is that there is little evidence that film incentives lead to more films being produced.
This means the incentives merely pay entities to engage in activity that they would already engage in, and thus jobs are mostly shifted from one state to another.
While some may be content with moving jobs from another state to New Mexico, given that the nation has a net loss of several million jobs over the last several years, government at all levels should be focused on policies that foster job creation.
The analysis of the Tax Foundation may be regarded as simply an ideologically-driven conclusion based on the think tank’s free market positions on economic issues. Interestingly enough, an analysis by the center-left Center for Budget Policy and Priorities (CBPP) reached the same conclusion.
Here, 10 separate studies from eight different states were highlighted, and all but two of these studies showed that states lost money on film incentives – averaging between 70 and 80 cents for every dollar spent. The only two studies that showed greater than one dollar return for every dollar spent were both performed by Ernst and Young.
Many issues have been raised with Ernst and Young’s New Mexico study, including not factoring in the zero-percent loans granted to films and the fact that the study claimed an average film industry salary much higher than what is reported by the Bureau of Labor Statistics.
The strongest defense of the film industry incentives is the additional economic activity generated by the industry’s presence in New Mexico. With regard to this ripple effect, the CBPP report detailed the exhaustive study conducted in Massachusetts. That study concluded that because higher-paying film-related jobs often went to non-residents, only 40 percent of the total payroll dollar amount (direct and indirect) produced by the film industry went to residents of Massachusetts.
This is clearly a difficult effect to quantify, so I will press to ensure that a similar analysis is conducted in New Mexico as a result of the passage of Senate Bill 44.
Film subsidies versus oil and gas subsidies
Conrad D. James
Another concern in this debate was with regard to the focus on film industry incentives to the exclusion of other industries such as oil and gas industry. This is a fair concern, but I believe that we should draw a line of distinction between subsidizing a necessary commodity such as energy and a non-necessary commodity such as film production.
Our civilization’s ability to harvest energy is a major driver behind why our technology has reached out into the depths of our galaxy, lifted billions out of poverty, and produced a standard of living that was unheard of throughout the bulk of recorded human history. Medicine, plastics, transportation, indoor plumbing, refrigeration, etc. – none of this occurs without energy, and we should always keep that in mind.
Even so, subsidies for oil and gas are a legitimate concern, so an examination of the actual numbers is certainly warranted. In 2008, the amount of oil and gas industry incentives (credits, deductions, etc.) was approximately $199 million. Meanwhile, the total direct revenue from this industry to our state that year was $2.9 billion, producing an incentive to revenue ratio of approximately 6.7 percent.
Even when the price of oil and natural gas were lower and the direct revenue to the state was much lower at $1.6 billion, as in 2004, the incentive to revenue ratio was still only 5.6 percent.
For the film industry, the amount of rebates paid by the state from 2003-2008 totaled $218 million, while direct revenue due to the industry over those years was $1.3 billion, giving an incentive-to-revenue ratio of 16 percent. Thus, using an admittedly simplified analysis, the generosity of the film incentive is more than twice that provided to the oil and gas industry when properly normalized to direct revenue.
An important aspect of solving problems
Government investments in the private economy are an important aspect of solving problems faced by our state and our nation, including tax-funded privately-operated research labs (such as my employer) to competitive grants provided to universities. Government funding in the computer chip industry, the Internet, alternative energy, and pharmaceutical products have transformed our society for the better.
But tax-funded incentives on the production side of the private economy are a different animal. To work properly, such incentives must be low in magnitude (amount or duration) to increase the speed of the return on investment and broad in distribution to minimize distortion of the private market.
Generous and narrowly-targeted production-side incentives cost too much and distort the chain of supply and demand, leading to expensive programs with the government picking winners and losers in the private economy.
I support the film industry, as it provides valuable goods and services, including the jobs and health insurance provided to workers and the economic activity it generates for other businesses. But I also support the pet-grooming services industry, and the auto body repair industry, and the medical billing industry, and every other industry that provides goods and services that improve our quality of life. Thus, my goal as a legislator is to create a friendly environment in our state for all businesses by keeping business taxes and incentives low, broad, simple and predictable.
I welcome dialogue and ideas from New Mexicans of all political ideologies to assist those of us in state government to accomplish this goal and to help our great state prosper for years to come.
James, a Republican, represents the Albuquerque-area District 24 in the N.M. House of Representatives.