Wednesday, February 23, 2011

Cut! Michigan Film Industry on the Budget Room Floor

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Reactions are still emerging from the release of Michigan Governor Rick Snyder's budget proposal last week. I commented on my first impressions late last week and am now following up on a more detail look into some of the more controversial aspects of the budget.

From my morning overview of Michigan news sources, it appears that much of the budget discussion today focused on the state's film industry incentives program. Mitch Albom writes that Snyder's proposal to scale back the nation's most generous film tax incentives felt like getting "punched in the stomach."

I understand the allure of the film industry and the magic of movies. I wrote about it on the blog last fall (parts IIIIII, & IV). The film incentive program is very popular and there is a lot of anecdotal evidence that shows that it has been successful. Still, the overall evidence on the success of the program is mixed. A recent Earnst & Young study states that every $1 spent on the program generates $6 in state economic activity which contradicts the 2010 Senate Fiscal Agency report from last fall that found that the program will never "pay for itself."

The problem with Albom's criticism is that it is written like kid in a tantrum who's had a new toy taken away:  "Snyder acts as if the world consists of one type of business -- a type that only wants low state taxes. He's wrong."

"No, Walter, you're not wrong. You're just an asshole." - The Dude


Snyder's not wrong, but Albom and others have essentially reacted like the Dude and called him an asshole (editors note: Walter is enventually right about everything). Snyder knows that there are plenty of businesses that like government subsidies and tax credits much more than low taxes. The problem is that an economy founded on business reliant on government subsidies cannot sustain long term economic growth.

That's why I am impressed with the Governor's budget proposal and willing to sacrifice the Michigan film incentives program, as cool and sexy as it is, since Snyder seems to understand that an economy can't be built upon massively subsidized industries and gets the state away from a policy of the government picking winners and losers by phasing out tax credits and subsidies.

It would be a different matter if the film incentives were nixed and those resources went to subsidize a different industry. The new proposals will likely lead to more small businesses emerging and growing than going all-in on a specific industry making it impossible to predict which specific industries will emerge but creating an environment for sustainable growth.

Now this is tough to accept, since as someone challenged me yesterday, what industries will be flocking to Michigan soon?

It's impossible to predict what industries and markets will emerge. It is unclear whether businesses will move to Michigan, but the new tax policies will help Michigan retain the businesses and entrepreneurs already there and foster a better business climate for them to start or expand their businesses. Furthermore, eliminating subsidies and tax credits, such as the Michigan film credit, frees up capital and resources to invest and grow the existing and new businesses that will emerge.

Yes, it's difficult to let a visible industry such as the film industry go without the certainty or even a false political promise that it will be replaced by another equally cool or sexy industry (ooh, tech or "green" jobs), but continuing to target and invest in industries just because they sound good coming from a politician does not make it so and takes resources away from other markets or industries.

If you need certainty...of course, you can get a lot of anything if you want to subsidize it enough. Michigan could be the national/world leader in llama farms if it announced it would provide an 80% tax credit incentive. Llama farmers would flock to Michigan to take advantage, many more would take up the profession, and indeed jobs would emerge to support the llama industry and local companies would benefit. But Michigan tax payers would still be subsidizing those jobs and all of that capital, land, labor, and resources would be going to llama farms as opposed to other agricultural products or other businesses.

The best news coming from the initial direction of the Snyder administration is that is going to get away from the old style of politically favored special interests, businesses, or industries and create an environment where everyone has to sustain themselves on their merits without being able to rely on political connections or tax payer handouts.

While it is a bummer that movie stars and celebrities will no longer be hanging out in Michigan to make films, Michigan is beginning to take the bold and necessary steps toward long term growth and sustainability.

2 comments:

  1. At the expense of its K-12 and university education system, middle class public employees, and local services. And let's add on an additional $1.5 billion in corporate tax breaks just to make the deficit even harder to dig out of. Yeah, great plan.

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  2. I think it's usual to have reactions with the proposal made. Thanks a lot for the info.

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