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CARSON CITY — Today, before the Senate Revenue and Economic Development Committee, Geoffrey Lawrence, NPRI’s deputy policy director, delivered the following testimony on SB 165, a bill that would establish transferable film tax credits.

NPRI generally opposes special tax credits, abatements or exemptions for favored industries. These special breaks bias the marketplace — impinging on taxpayers to reward firms or industries with political influence. Every dollar that is awarded through a special tax credit is a dollar that is unavailable to finance public services. As a result, taxpayers with less influence must bear a heavier burden in order to finance those services.

The argument of proponents centers around the notion that these tax credits are necessary to lure targeted firms into Nevada and that the prospective tax revenues that would otherwise be paid by these firms wouldn’t exist if not for the tax credits that lure them here. However, tax scholars from both the political Right and the political Left have regularly criticized this argument.

For example, the Tax Foundation, looking specifically at state film tax credits, concludes:

“Film tax credits fail to live up to their promises to encourage economic growth overall and to raise tax revenue. States claim these incentives create jobs, but the jobs created are mostly temporary positions, often transplanted from other states. Furthermore, the competition among states transfers a large portion of potential gains to the movie industry, not to local businesses or state coffers.”

State film tax credits began gaining widespread popularity in the mid-2000s. The nationwide total of these credits grew from $3 million in 2000 to $1.4 billion by 2010. What have we learned from this track record? The promises of the film industry have largely proven false and the warnings of tax economists have proven correct.

Louisiana’s non-partisan Legislative Fiscal Office, for instance has examined the fiscal impact of the state’s film tax program and concluded that the claims of film tax credit advocates are overblown. The Fiscal Office analysis shows that the program creates a net loss for the state’s budget even after accounting for all multiplier effects and additional employment created by the film industry. The net fiscal effect was an annual net loss for the state budget of more than $48,000,000 annually in every year between 2006 and 2011. The Office’s chief economist concluded:

“After accounting for the dynamic effects on the economy of the additional film and video production activity, the State may expect to recoup 16 percent to 18 percent of the tax revenue it obligates to the program through the transferable tax credit mechanism.”

That’s why states with film tax credits have recently begun to repeal these programs. In 2010, a record 44 states had these programs. Since then, eight states have ended their programs, including Arizona, Arkansas, Idaho, Iowa, Kansas, Maine, New Jersey and Washington. Other states have scaled back their programs or placed caps on their use. These include Alaska, Connecticut, Georgia, Hawaii, Michigan, Missouri, Rhode Island, Wisconsin and even the much-vaunted New Mexico.

These programs have been rolled back because most of the benefits have accrued to the film industry while they have generated few long-term benefits to local economies.

The current proposal, however, is even worse than most other states’ film tax credits, because it would award more in credits than the amount of tax liability that filmmakers would face. Further, the credit would be transferable, meaning that filmmakers can sell these credits on a secondary market to individuals who have nothing to do with the film industry. As a result, they would be able to essentially use Nevada taxpayers as an ATM machine to withdraw credits and then sell them on the secondary market.

This is not just theoretical. Late last year, film producer Danny Bigel launched a new market exchange for monetizable state tax incentives called the Online Incentives Exchange. The Exchange claims to be the “first truly national, transparent, liquid exchange for the trading of state tax credits.” The Exchange — which is outside the regulatory oversight of the SEC — reports that the market for transferable state tax credits exceeds $5 billion annually. At the moment, the Exchange primarily trades credits awarded by Louisiana, California and Georgia. But make no mistake, Nevada would soon be added to this list if it creates a transferable tax credit. That would mean Nevada taxpayer money being passed around by traders far outside of our state.

I’d like to quote the Center on Budget and Policy Priorities — a left-wing think tank in Washington, D.C. with which NPRI is typically in disagreement. Still, they’ve concluded:

“When a state grants a tax credit that is larger than the tax that is actually due, then it's essentially making an equity investment in the business. The state, which is to say, all other taxpayers, should reap the upside of that investment. It shouldn't be captured by the seller of the credit, the buyer, or a middleman. A transparent market for transferable tax credits is all well and good, but that doesn't change the fact that the state isn't benefiting when it should.”

If Nevada policymakers want to promote economic development and job creation in the Silver State, there is a path available to them. It includes removing the barriers imposed on native entrepreneurs by state and local governments. The Brookings Institution has pointed out that less than 2 percent of new job creation results from the cross-state movement of firms, but 57 percent results from the launch of new enterprises by native, small-time entrepreneurs.

NPRI recently outlined a plan to simplify this path to entrepreneurship for Nevadans by streamlining the state’s regulatory structures, filing requirements and labor-market strictures. The report includes very specific recommendations, including an aggressive expansion of the state business portal.

Special tax credits for film or other industries with political pull, however, is not the path to sustainable economic development.

Read more:

• NPRI study: The Path to Sustainable Prosperity
• Tax Foundation: Movie production incentives & film tax credits: Blockbuster support for lackluster policy
• Louisiana Legislative Fiscal Office: Film and video tax incentives

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CARSON CITY, Nev. — The “jobs” plan offered today by Nevada’s Senate Democrats evaded the central problem facing genuine job creators in the state, says Geoffrey Lawrence, NPRI’s deputy policy director.

“It's disingenuous for Nevada lawmakers to talk about promoting job growth at the same time that they perpetuate some of the most strenuous regulatory structures and filing requirements in the nation,” said Lawrence.

He noted that a recent Institute for Justice study found that “Nevada is among the top tier of the most broadly and onerously licensed states, ranking fourth.”

Rather than face that reality, Lawrence said, Senate Democrats proposed new tax credits for the film industry, moving funds from the state's operating budget into the highway fund to finance public-sector construction projects, moving more funds into the state's Knowledge Fund and creating new incentives within the state's Modified Business Tax.

“Unfortunately for struggling Nevadans,” he said, “the ‘jobs’ plan unveiled today is simply a retread of stale and failed government programs. None of the items introduced by Senate Democrats addresses the core factor that hinders economic growth — the obstacles that Nevada government places in the way of private entrepreneurship.”

He continued:

The film tax credit idea is an especially poor way for government to pick winners and losers in the economy, and many states are now dismissing film tax credit ideas as failures. Arizona, Arkansas, Idaho, Iowa, Kansas, Maine, New Jersey and Washington have all effectively eliminated their programs since 2009. According to the Tax Foundation:

“Film tax credits fail to live up to their promises to encourage economic growth overall and to raise tax revenue. States claim these incentives create jobs, but the jobs created are mostly temporary positions, often transplanted from other states. Furthermore, the competition among states transfers a large portion of potential gains to the movie industry, not to local businesses or states.”

Lawrence noted that spending on state construction jobs is especially wasteful because prevailing wage laws mandate that state and local governments pay wages that are 44 percent or more higher than in the private sector. He said:

If financing government construction and research jobs improved the economy, the $787 billion federal stimulus wouldn’t have been an utter failure. Instead, what Senate Democrats are proposing would only create short-term jobs for favored interest groups.

Lawrence found it “at least encouraging that Senate Democrats acknowledge that the Modified Business Tax is a disincentive for hiring workers.” However, he said, the answer isn’t creating exemptions for favored firms, but to eliminate the tax entirely. He continued:

A much more effective approach for promoting economic development and job creation is to lower the administrative, legal and financial burdens that have been placed on entrepreneurs by state and local governments. How genuine is it for Nevada politicians to talk about promoting job growth when, at the same time, they refuse to deal with one of the most onerous sets of regulatory structures and filing requirements in the nation?

The recent Institute for Justice study Lawrence cited noted that “not only are [Nevada’s] fees many times higher than other states, but the experience and education requirements are as well:

Nevada is one of only four jurisdictions that license interior designers, requiring one exam, $250 in fees and six years of education or experience; meanwhile 47 states do not license interior designers. On average, the 21 states that license travel guides require $191 in fees and 58 days of education; Nevada requires $1,500 in fees and two years of education.

“Entrepreneurs,” noted Lawrence, “are Nevada’s job creators. And entrepreneurs, like Amy Groves, Carolyn Davis and Scott Godino, Jr., have identified government as their biggest obstacle to creating jobs. If you want sustainable economic growth, you must scale back government barriers to private-sector job creation.”

For policy solutions that would truly promote job growth, Lawrence recommended those in The Path to Sustainable Prosperity, a recent report by the Nevada Policy Research Institute.

Read more:

• Amy's story: How Nevada restricts real estate professionals
• Carolyn's story: How onerous licensing requirements hurt would-be entrepreneurs
• Scott's story: How government put his business 'through a circus'

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