New Report Shows Shortcomings of Corporate Welfare

Pennsylvania moviegoers who bought tickets for M. Night Shyamalan’s Glass last weekend paid more than the price of the ticket.

They paid with their taxes.

According to the Department of Community and Economic Development (DCED), Glass was approved for $5 million in tax breaks. A little “thank you” to Shyamalan for gracing Philadelphia with his presence.

The Independent Fiscal Office (IFO) recently conducted three performance reports of tax credits including the Film Tax Credit. The big takeaway? Tax credits may not be a good way to create jobs.

Consider these findings on the Film Tax Credit (emphasis added):

  • Although the tax credit incentivizes productions, it is difficult to see the impact in recent government data. The current tax credit retains jobs, but it is likely insufficient to expand the industry due to competition from other states and the transient nature of annual production activity.
  • Nearly all tax credits are transferred or resold because recipients lack sufficient tax liability to utilize the credits.
  • The analysis finds that the net return on investment (ROI) is 13.1 cents of state tax revenue for each tax credit dollar. That ROI is consistent with other government and academic studies.
  • On net, the tax credit retains roughly 1,140 jobs per annum and $68 million of labor income. That outcome assumes that 90 percent of productions are incentivized by the tax credit. If the true figure is half that, then the tax credit has no material net economic impact.

And the smaller tax credit programs evaluated seem even less effective in encouraging economic growth. The return on investment for the New Jobs tax credit could be negative. The IFO study finds very few companies creating jobs utilize the credit, even calling it “more of an accounting function.”

Referring to the New Jobs creation tax credit , Senator Browne noted:

Right now, on a financial basis, based on what the [Independent Fiscal Office] has presented to us, the job creation tax credit we can pretty much get rid of because the information that's available to us, and probably was available for a long time, it's  three cents on the dollar does not incentivize a company to hire somebody.

Despite the poor economic justification, tax credits get support because they are good politics. It’s a lot of fun subsidizing Hollywood celebrities, even if it doesn’t create jobs.

One official cites fan fever as a “benefit” of the film tax credit.

She highlighted how film star Seth Rogen  provided free publicity while filming in western Pennsylvania. He posted his visit to Fallingwater, the Frank Lloyd Wright designed-house, on his Instagram account that reaches 6.4 million followers. “We can’t afford that kind of exposure.”

I’ve also visited Fallingwater and posted pictures. So have thousands of other Pennsylvania residents and tourists—it didn’t take $11.3 million in tax breaks, like Hollywood studio Gravitational Productions got for Pickle, to get people to share on social media.  

Ineffective corporate welfare isn't unique to Pennsylvania. The Wall Street Journal highlighted an audit of job creation tax credits in New Jersey that found 20 percent of claimed employees couldn’t be verified.

Here’s an idea: Instead of paying millions in tax credits for jobs that can’t be verified, maybe New Jersey should cut tax rates. This would send a signal that the state won’t pick winners, and that it intends to become a friendlier place to do business, at least compared with New York and Connecticut.

There’s a better solution to attract businesses to Pennsylvania and create jobs: Lower the tax burden on all businesses, not just those with the best lobbyists.

If lawmakers eliminated all $847 million of Pennsylvania's corporate welfare programs, they could reduce the state's corporate income tax from 9.99 percent to 7.04 percent, ranking us number 19 instead of number 3. That would truly roll out the welcome mat to job creators.