Additional Negative Consequences of Targeted Tax Credits

The June 2010 issue of Governing features an article about the discussion surrounding film tax credits. Despite the fact that I’ve written about this topic extensively on this blog, there are some negative consequences that I haven’t specifically discussed yet.

In the following excerpt, the article identifies one of the most significant problems with tax credits. Although it cites film tax credits specifically, this problem applies to targeted tax credit programs in general (emphasis mine):

The worry, [Massachusetts State Representative Steve] D’Amico says, is that states’ one-upmanship may have created an irreversible system of incentive handouts. Offering these kinds of broad tax incentives to film companies isn’t creating a permanent new industry in Massachusetts; it’s merely setting the state up to pay an ongoing subsidy it can’t easily get out of.

The article also identifies additional problems that result from the transferability of these credits, such as they are in Missouri:

Getting good data isn’t the only problem. “These film credits have another shoe to drop,” says [Robert] Tannenwald of the Center on Budget and Policy Priorities. He’s referring to the fact that in most states, the incentives paid to movie studios are transferrable. That means a film producer can sell unused credits on a secondary market. As a result, the credits could wind up benefiting people who have nothing to do with movies or entertainment. Worse, Tannenwald says, reselling the credits means they may be redeemed years down the line.

Unredeemed tax credits represents a huge liability for a state. According to the state audit of Tax Credit Cost Controls released in April 2010, the size of this liability is significant and difficult to estimate (emphasis mine):

Based on the 63 tax credit analysis forms submitted by state agencies administering tax credit programs for the current legislative session, tax credits totaling $500.6 million have been issued but not redeemed as of June 30, 2009. The Committee on Legislative Research, Oversight Division issued a program evaluation, Review of the State of Missouri Tax Credit Programs, in March 2010 which reported the estimated amount of tax credits issued in previous years and not yet redeemed as of June 30, 2009, was approximately $496 million. The Joint Committee on Tax Policy compiled a report of DED administered credits as of October 1, 2009, which reported an estimated total state tax credit liability of about $2.38 billion comprised of $599.8 million tax credits issued but not redeemed, $686.9 million tax credits authorized but not yet issued, and $1.094 billion in streaming tax credits that have been authorized and will be issued as the program requirements are met. The amount reported for the streaming credits estimates only tax credits that will be issued from October 2009 through fiscal year 2014. The amounts stated in this section are based upon estimates from the agencies administering tax credit programs. The exact amount of tax credits that will ultimately be issued and redeemed is unknown due to future actions of tax credit recipients and carry forward and back features of individual programs.

When these tax credits are redeemed in the future, it could cause the state to run a deficit, or exacerbate an existing deficit. Even if a state were to scale back or eliminate its incentive program (as has been done in Arizona, Michigan, Iowa, and New Jersey), it could still end up paying out credits in the future as they are redeemed. The uncertainty of when these tax credits will be redeemed makes it difficult for policymakers to forecast and plan future budgets. The tax credits will be redeemed at some point — just not necessarily during the same year that they were issued.

Missouri residents would be better off if the state government widened the tax base by eliminating targeted tax credits instead of continuing to subsidize specific industries in the market.