You can watch the full episode here:

In the episode, Jenna stars in a horror film that’s shot in Connecticut. It turns out that Connecticut will only give tax credits to films that promote tourism. So, instead of shutting down the film, the producers change it to be very pro-Connecticut. They decorate the killer’s dungeon with Yale pennants and  posters that say, “Visit Connecticut.” They also write www.IheartConnecticut.com in blood on the wall, and they dress up one of the victims in a UConn Huskies shirt.

They even change the dialogue:

SLAUGHTERFACE: “No one is going to save you. Because we’re deep inside one of Connecticut’s 30 beautiful state forests. Thirty!”

JENNA: “Oh, please don’t kill me! I still haven’t tried the famous seafood pizza at Sally’s in New Haven.”

It’s hilarious. This shows how filmmakers will change the message of their films in order to get film tax credits from a state. This is something that I have discussed before on the blog.

It’s no secret that government officials sometimes deny tax credits to films that don’t send a positive message about the state. It may be possible that this happens in Missouri, too. Consider Up In the Air, which received $4.1 million in tax credits to shoot in Missouri in 2009. One scene sounds like a commercial for Lambert Airport. At one point, George Clooney’s character says:

Are you kidding — Lambert Field? The Wright brothers flew through there. That domed main terminal is the first of its kind; it’s a precursor of everything from JFK to de Gaulle.

This wasn’t the first time that “30 Rock” highlighted the ludicrousness of film tax credit programs — It was also a plot point in an episode last season, in which Jenna starred in a movie about werewolfs that shot in Iceland. They shot the film there because the Icelandic government gave them tax credits, but they could only shoot during the one minute of darkness each day.

In economist-speak, we would say that Iceland does not have a comparative advantage in werewolf films, relative to other locations. (Similarly, Missouri doesn’t have a comparative advantage in filmmaking. We’re better at making other things!)

The post Film Tax Credits Featured on “30 Rock”! appeared first on Show-Me Institute.

State lawmakers want to turn Saint Louis into an international cargo hub. Sounds great, right? Who wouldn’t want that?

Unsurprisingly, state lawmakers decided to do this by providing millions in tax incentives to private companies. They want to give up to $60 million in tax credits to companies that export by air from Missouri, and $420 million in incentives toward the construction of storage facilities. My colleague Audrey Spalding already argued that this policy would subsidize the construction of warehouses abroad, and that trade will occur independent of government intervention. Essentially, we’re paying our trading partners to buy our products.

In this post, I will introduce some additional arguments against using taxpayer monies to boost foreign exports. Don’t get me wrong; I am an enthusiastic supporter of foreign trade. (And, as it turns out, 90.1 percent of economists agree with me on this.) I just disagree that taxpayers should be forced to pay for it.

The air hub would benefit some groups in the Saint Louis area, but taxpayers throughout Missouri have to pay for it.

People living in Saint Louis will receive more of the benefits, but the other taxpayers in Missouri will have to help shoulder the cost. A taxpayer in Joplin or Sedalia will pay proportionately the same as a taxpayer in Saint Louis, despite the fact that he doesn’t directly benefit from the policy. This is an unfortunate case of concentrated benefits and diffused costs, a phenomenon I have described before on the blog.

Tax Credits in Missouri are already out of control.

From 1998 to 2010, tax credit redemptions have grown from $102.7 million to $521.5 million, and they’re continuing to grow. At the same time, state revenues are falling. This is not sustainable in the long-term. Both the Tax Credit Review Commission and the state auditor’s office have recommended changes that would limit tax credits, but so far lawmakers have adopted none. I wish that lawmakers in Missouri would implement measures that limit — not expand — tax credits in Missouri.

Other government services compete for these funds.

Because Missouri is strapped for funds, lawmakers have made cuts to education and public safety in the state budget. Does this indicate that they believe being an export hub is a higher priority than education or public safety?

The subsidy steals activity from one location in order to give it to another, and will lead to an interstate bidding war.

The purpose of this bill is to steer cargo away from other cities, particularly Chicago. The bill’s sponsor, Sen. Eric Schmitt, recently said this in an article in the Saint Louis Beacon. From the perspective of a state legislator, this make sense. They want to get reelected, so they will focus on projects that are large and very visible to voters. However, the policy makes Illinois worse off because it causes businesses to leave the area.

Once enough companies leave Illinois to come to Missouri, it’s only a matter of time before Illinois retaliates by providing its own set of incentives to lure them back. We see this in the auto industry, in particular. As a result, targeted tax credit programs encourage states to engage in a bidding war. This is a problem because taxpayers are left to pick up the tab. Even though subsidies don’t create new economic activity (they merely shift it from one location to another), taxpayers are forced to devote increasing amounts of their tax monies toward attracting businesses and industries. They’re paying more, but they’re not getting more.

Local economies would be wise to stop viewing each other with antagonism. Saint Louis would be better off if it focused on its comparative advantage and let exporting activity stay in Chicago.

The post Subsidizing Exports Will Do More Harm Than Good for Missouri appeared first on Show-Me Institute.

So it would be better to not subsidize these programs and allow them to not exist? It’s not worth it to let them become proven while working toward the longer-term goal of eliminating the subsidies?

The writer introduces infant industry argument, which supporters of subsidies commonly use. The argument implies that emerging industries need to be protected temporarily in order to develop the economies of scale that established companies and industries possess.

My answer is an emphatic yes. For reasons that I am about to describe, it would be better if the state did not subsidize these programs.

If these subsidies were eliminated, many groups would be better off. Consumers represent one group that would certainly benefit. Protecting industries hurts consumers because it: (1) restricts new suppliers from entering the market (which restricts supply and increases the price to the consumer); (2) removes the incentive for existing suppliers to innovate (which decreases product quality); and, (3) restricts their access to consume non-protected competitive products. Furthermore, eliminating subsidies to particular industries will not restrict the variety of goods and services available to consumers. When industries focus production according to their comparative advantage and then trade with others, Missourians will still be able to consume in the absence of subsidy.

Taxpayers would be better off in the absence of such subsidies, as well. The subsidies distort relative prices, which consequently distorts the mix of goods and services available for consumption. A firm that receives a subsidy from the government can charge a lower price to consumers, who consequently have an incentive to consume a greater quantity of it. Additionally, if the subsidies were eliminated, taxpayers would be able to keep a greater percentage of their earnings that they can save, invest, and/or spend on the goods and services that they naturally prefer in the private sector, rather than the goods or services that happen to have artificially lower subsidized prices.

Another group that would benefit from the elimination of subsidies is businesses and industries that do not currently receive subsidies. The government places this group at an artificial competitive disadvantage by dispensing political favors to its competitors.

Milton and Rose Friedman disputed the infant industries argument in their book Free to Choose: A Personal Statement. They wrote:

[T]he “infant industry” argument [is] advanced, for example, by Alexander Hamilton in his Report on Manufactures. There is, it is said, a potential industry that, if once established and assisted during its growing pains, could compete on equal terms in the world market. A temporary tariff is said to be justified in order to shelter the potential industry in its infancy and enable it to grow to maturity, when it can stand on its own feet. Even if the industry could compete successfully once established, that does not of itself justify an initial tariff. It is worthwhile for consumers to subsidize the industry initially–which is what they in effect do by levying a tariff–only if they will subsequently get back at least that subsidy in some other way, through prices lower than the world price or through some other advantages of having the industry. But in that case is a subsidy needed? Will it then not pay the original entrants into the industry to suffer initial losses in the expectation of being able to recoup them later? After all, most firms experience losses in their early years, when they are getting established. That is true if they enter a new industry or if they enter an existing one. Perhaps there may be some special reason why the original entrants cannot recoup their initial losses even though it may be worthwhile for the community at large to make the initial investment. But surely the presumption is the other way.

Additionally, subsidized industries have difficulty weaning themselves off government assistance. I have previously discussed this in the context of film tax credits. When a state protects a particular industry and/or provides financial aid, the industry tends to remain dependent on that protection or subsidy. Furthermore, industries that are subsidized do not have an incentive to innovate because they are not subject to the same competitive pressures as those that are unsubsidized.

More often than not, when an industry refers to itself with the “infant” term, it’s simply seeking rent through legislative favoritism. Milton and Rose Friedman also discussed this concept in Free to Choose: A Personal Statement. They wrote:

The infant industry argument is a smoke screen. The so-called infants never grow up. Once imposed, tariffs are seldom eliminated. Moreover, the argument is seldom used on behalf of true unborn infants that might conceivably be born and survive if given temporary protection; they have no spokesmen. It is used to justify tariffs for rather aged infants that can mount political pressure.

The post The Case for Eliminating Subsidies to Industries appeared first on Show-Me Institute.

One particular member of the commission (I do not remember which one) attacked a previous speaker who had recommended that all tax credits be abolished. The commission member suggested that since every other state uses tax credits, Missouri’s exit from the business of providing tax credits would put us at such a disadvantage that could result in Missouri no longer producing anything. There are many possible responses to this complaint that tax credit opponents can employ; for brevity, I will note just one.

Comparative Advantage:

Consider two states: Missouri and California. Suppose that these two states have firms that can produce two goods: wine and computers. Now, suppose that firms in Missouri can produce six bottles of wine or three computers per hour, whereas firms in California can produce 12 bottles of wine and four computers per hour. In this case, California firms have a higher productivity and we would say that California has an absolute advantage in the production of both wine and computers. This does not, however, imply that California will, or should, produce both goods.

One of the key insights from introductory economics courses is that comparative advantage matters. Instead of evaluating productivity in terms of outputs, we can evaluate productivity in terms of opportunity cost. Note that, in this example, when a Missouri firm produces one bottle of wine, it misses an opportunity to produce half of a computer. Similarly, when a Missouri firm produces one computer, it misses an opportunity to produce two bottles of wine. We can think of these missed opportunities as costs. For California firms, the cost of producing one bottle of wine is a third of a computer, and the cost of producing one computer is three bottles of wine. So, our example shows that even when California has an absolute advantage in the production of both goods, Missouri still retains a comparative advantage in the production of computers because its opportunity cost (two bottles of wine) is lower than the opportunity cost for California firms (three bottles of wine). Thus, in this limited illustration, it would be more efficient for Missouri to produce computers and trade with California for wine.

We can apply this insight to tax credits. Suppose that California aggressively courts winemakers and computer manufacturers with tax incentives and Missouri does not. One way to think about these incentives is that they work to lower the marginal costs that firms face, which allows a firm to produce more. This makes it appear as though California firms are more productive in translating inputs (in dollars) into outputs (in product volume). As our example illustrates, even if these apparent increases in productivity give Californian firms an absolute advantage in the production of certain goods, it is likely that Missouri will still retain comparative advantage and will continue to produce many of the goods that California chooses to subsidize.

The post Paging David Ricardo appeared first on Show-Me Institute.

Cutting the film tax program will have many positive consequences for Hawkeyes. For one, they won’t be forced to sink money into an industry that is not efficient, cost effective, or sufficiently demanded. Additionally, they will be better off because they can achieve a higher indifference curve by spending their money on a bundle of goods and services in the private sector that more accurately satisfies their needs and wants. They will also be able to focus on producing the goods and services for which they have a comparative advantage, and then engage in mutually beneficial trade with individuals and companies in other states. This means that Iowans will still be able to consume films, and they will be able to increase their consumption of other products, too. Furthermore, they will only have to pay the cost of a movie ticket or a DVD — not millions of dollars in subsidy to the film production industry.

Cutting the film tax credit program does not imply that film production will halt in the state. For example, Wisconsin, my home state, has similarly scaled back its film tax credit program and it is able to attract blockbuster film productions all the same.

Even if there were a comprehensive audit of a film project before state tax credits were issued, this program still wouldn’t be a worthwhile expenditure of state funds. To this point, I particularly like the following quotation from Iowa’s governer about the economic impact of his state’s film tax credit:

“That has never been a focus that really makes a difference in terms of job creation and economic development.”

Policymakers in Missouri would be smart to follow the examples of Iowa and Wisconsin. Missouri’s film tax credit program is structured very similar to Iowa’s (former!) program, except that it is even more generous — Iowa provided a 25-percent tax credit, and Missouri provides up to 35 percent.

The post Iowa Is Cutting Its Film Tax Credit Program Permanently (And Missouri Should, Too!) appeared first on Show-Me Institute.

A special legislative session offering incentives to Missouri’s automobile industry was transformed Tuesday into a tax-break boon for elderly homeowners, airplane makers and more.

The Missouri House passed legislation extending tax breaks to senior citizens, computerized data centers and manufacturers in a broadly defined transportation sector encompassing everything from bicycles to rockets and food-vendor carts to floating offshore oil platforms.

My colleagues and I have have been arguing voraciously against other companies that seek handouts from the Missouri state government. Other states are discovering that tax credits fail to deliver the results that they promise, and I have heard no convincing reason to believe that targeted tax credit programs will work any differently in Missouri.

From the perspectives of economics and fairness, these programs defeat their ostensible intended purposes: encouraging employment and helping states compete. In subsidy programs, the state government redistributes wealth to special interest groups in the form of concentrated benefits (e.g., sugar substitute manufacturers, data centers, ethanol producers, car manufacturers) and it diffuses the costs of these benefits to all those who remain unsubsidized in the marketplace.

Whenever the government subsidizes an activity, it comes at the expense of other activities. This is because time, money, and resources are scarce and finite. As a result of its decision to subsidize an activity, the state government incites individuals and businesses in Missouri to divert resources from other productive uses and invest them in activities for which they have a higher opportunity cost than others. By subsidizing these activities, the state gives up marginal levels of productivity. Missourians would be better off if each market participant specialized in the activities that they do well and profitably without the need of a subsidy, and left the production of other things — such as vehicles — to those who posess a comparative advantage in producing it. By focusing on profitable non-subsidized economic activity and then engaging in trade with others, overall levels of productivity and consumption will increase.

There are two systems within the unrestricted market that are better than tax incentive programs at promoting productive economic development: the price system and the profit-loss system.

The price system is a better means of achieving an efficient allocation of goods and services than targeted incentive packages. Prices coordinate individual action efficiently by communicating relative scarcities and preferences, but government officials knock the price system out of this equilibrium whenever they decide to subsidize or restrict an economic activity. This results in a misallocation of resources, and produces a market bubble that will eventually burst, as the subsidy ends. (Will Missouri host the first sugar substitute bubble? I hope not!)

Allowing the profit and loss system to allocate resources efficiently in a free market is better way to encourage economic development. However, when the government intervenes in the market through targeted subsidies, the “loss” signal is muted as a consequence because producers are at least somewhat insulated from risk. As an additional consequence, producers have less of an incentive to respond to consumer demand, which mutes the incentive for producers to target their operations efficiently. For example, as a result of agricultural subsidies and tariffs, much of the sugar that we consume in the United States is made from beets instead of from sugar cane. This is a less efficient process of making sugar, and consumers pay a higher price for it.

Government should focus on providing the basic institutions that foster reliable market exchange (e.g., enforcing contracts, backing currency, etc.), instead of favoring losers in the marketplace in the name of economic development.

The post Concentrated Benefits, Diffused Costs appeared first on Show-Me Institute.

First, I realize that the caller suffers from “make-work bias,” a concept developed by Bryan Caplan, a professor of economics at George Mason University, in his book The Myth of the Rational Voter: Why Democracies Choose Bad Policies. In an excerpt published in Reason, “The 4 Boneheaded Biases of Stupid Voters,” Caplan writes (emphasis mine):

The public often literally believes that labor is better to use than conserve. Saving labor, producing more goods with fewer man-hours, is widely perceived not as progress but as a danger. I call this the make-work bias, a tendency to underestimate the economic benefits of conserving labor. Where noneconomists see the destruction of jobs, economists see the essence of economic growth: the production of more with less.

Second, I failed to point out that the caller focuses on the needs of a select group rather than those of everybody in the economy. This is a common error that people make when evaluating policies, as Frédéric Bastiat discussed in “What Is Seen and What Is Not Seen.” On the subject of subsidizing employment, Bastiat writes (emphasis mine):

[I]t is clear that the taxpayer who will have been taxed one franc will no longer have this franc at his disposal. It is clear that he will be deprived of a satisfaction to the tune of one franc, and that the worker, whoever he is, who would have procured this satisfaction for him, will be deprived of wages in the same amount.

Let us not, then, yield to the childish illusion of believing that [a vote in favor of subsidy] adds anything whatever to national well-being and employment. It reallocates possessions, it reallocates wages, and that is all.

When arguing in favor of tax incentives for the Claycomo plant, the radio caller considered only the benefit to the 3,700 plant workers who will keep their jobs. He doesn’t consider the unseen cost that, if the state legislature approves the proposal to provide $150 million in tax credits, the rest of the tax base (a much larger group) will be $150 million poorer. This policy doesn’t increase income; it merely displaces it. As a related unintended negative consequence, the organizations that may have employed these factory workers, had they been laid off, will be restricted in their growth because they would face a smaller supply of labor.

This brings me to my third point. Subsidizing the Claycomo plant would contribute to a higher level of unemployment in the long run, negatively affecting all of the workers in the Claycomo region. Caplan explains this too:

The hard lesson to learn is that giving people “rights to their jobs” is a drain on productivity—and makes employers think twice about hiring people in the first place.

The fact that Claycomo Ford plant will close if unsubsidized indicates that the area no longer has a comparative advantage in manufacturing Ford cars. The area would be better off if its resources — human and otherwise — were employed in activities that do not require subsidies. As a direct consequence, the region would have the capacity to produce more, and the individuals in the market would be able to keep a greater percentage of their income.

The post Why Closing Ford’s Claycomo Plant Would Be Good for the Economy appeared first on Show-Me Institute.

[A]ccording to some analysts and students of corporate behavior, […] companies that take a limited and more-targeted approach to layoffs tend to do better in economic recoveries than those that slash employment sharply and across the board.

“You can’t shrink your way into prosperity,” says Wayne Mascio, a business professor at the University of Colorado, Denver.

Although the article focused on downsizing in private companies, I think that the conclusion applies nicely to the public sector, as well. This is particularly relevant to state agencies in Missouri as they cope with their budget problems. Instead of scaling back their operations proportionately, governmental agencies in Missouri should take a targeted approach, by identifying programs that are underperforming and subsequently eliminating or outsourcing them. This would increase the likelihood that the programs would recover and perform better in the future.

When determining which programs, or segments thereof, to cut, a firm or a government agency should also consider non-financial and indirect costs. This is because unintended negative consequences could adversely affect a firm or an agency’s bottom line, as well as its ability to perform core functions. In order to increase its overall growth and prosperity, a firm or agency should focus on the activities for which it has a comparative advantage, and then trade amicably with others that possess a comparative advantage in other activities.

The firm or government agency in question should also consider its opportunity cost for providing a program under review. Outsourcing non-core functions enables concentration on core functions, which can improve efficiency and quality. This way, firms and agencies alike could maximize their up-time and productivity.

The post “You Can’t Shrink Your Way Into Prosperity” appeared first on Show-Me Institute.

What’s not to like?

On the contrary, what’s not to dislike? Film production incentive programs are undesirable policy for states, including Illinois and Missouri, and they have many unintended negative consequences. I have written extensively about film production incentive programs before. In this post, I’d like to highlight specific statements from the editorial and explain why they are incorrect in an economic sense.

Expect this flurry of activity to continue.

The estimated economic and fiscal impact of these programs is debatable. Film tax credits do not result in permanent economic activity because the purchases are single-time expenses and they do not create permanent jobs. The Tax Foundation recently released a study that concluded these programs fail to incite economic growth. In fact, the programs restrict growth because they force taxpayers to support an entire industry.

The tax credit is something lawmakers got just right — in size, scope and sustainability.

Tax credit programs in Missouri are anything but “just right” in size, scope and sustainability, because they are growing at a much faster rate than the state’s revenues. This is why the Missouri state auditor’s report on tax credits recommends that government officials set both expiration dates and annual and cumulative limits for all tax credits programs, including those for film productions. The state of Missouri has awarded nearly $13 million in film tax credits since 2000, and this money comes at the expense of basic government functions, such as education.

“It creates jobs without breaking the bank.”

This is fundamentally false. First, as Henry Hazlitt explains in Economics in One Lesson, this kind of spending destroys jobs in the private sector. As a positive consequence of eliminating the program, there will more workers available to do other kinds of work. Second, for reasons I described earlier, this program is very expensive!

“And it has the potential to make Chicago not only a destination for big Hollywood productions, but also a center of independent film activity.”

States like Missouri and Illinois do not have a comparative advantage in filmmaking, so most film productions are more efficient and cost-effective when undertaken in states that have this comparative advantage. Spending public funds to bring film productions to Missouri means that extra resources are expended to make films, which also means that those resources are no longer available for use in other industries. If Chicago, Kansas City, or Saint Louis were truly suited to be a center for the film industry, it would happen in an unregulated market, independent of government assistance.

Furthermore, it seems to me that practically every state aspires to be a center for the film industry. First, by definition, they can’t all be the center. Second, from the perspective of a government agency, why is filmmaking preferable to any other activity? The free market — not the government — should decide which economic activities occur in an area.

“[T]he value of Chicago’s film infrastructure overcomes bigger tax credits from neighboring states. […] And a plethora of talented stage actors call Chicago home. In other words, you have a place that provides everything a filmmaker might need.

The availability of desirable resources is already a significant incentive to locate in an area. If a state boasts resources that are attractive to filmmakers, then it should not need to use tax credits to encourage firms to locate within its borders.

States like Missouri and Illinois do not have an absence of supply of film production; I disagree that this is the issue, however. Instead, what these states experience is an absence of demand for filmmaking. Unless other factors change over time, there is not enough demand in Missouri for the film industry to exist here without a considerable level of government assistance.

The post So Much Misinformation in This Editorial … So Little Time! appeared first on Show-Me Institute.

While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.

To see this lesson applied, check out the personal blog of Jason P. Hunt, a film and television producer in Kansas City. He uses it to voice support for H.B. 1587, which would increase the cap of film production tax rebates from $4.5 million to $10 million. Although I’m getting bored of blogging about the production incentives program in Missouri, I want to refute the specific points that Hunt made in his most recent post, “An Open Letter to the Missouri Senate”:

I understand several in the legislative branch would question why we need to increase this cap.

I question this, too, especially since only one single production in Missouri has ever come close to the $4.5 million cap during the last 10 years. (That production was Up in the Air, which was awarded $4.13 million.) The second-highest amount ever awarded was $786,800. The “Show Me: Tax Credits” web tool shows that the average amount awarded is only $369,347.

I suppose Hunt’s implicit argument is that glamorous, large-scale productions won’t be motivated to film in Missouri unless the state coughs up even more cash. If Missouri awards more money to an activity in which it has a comparative disadvantage, it faces an increasing opportunity cost. This is money that the state could otherwise devote to other programs and/or return to the pockets of taxpayers.

Consider that for every dollar allowed as a tax credit under the program, three have to be spent within the state.

From what I understand, an economic multiplier of 3 is unrealistic. In estimating the activity generated from its film incentive program, Louisiana uses a demand earnings multiplier of 0.3982. Here’s a math problem: How much wealth do a $61,000 Range Rover and a $68,000 Mercedes generate in a state? Using Hunt’s logic, they would create $387,000 of economic activity within the state’s borders. I disagree that this is realistic.

That’s found money.

That money comes from other states. If a person is walking to her car in a parking lot and finds $20 lying on the ground, she may consider herself to be $20 richer. However, the person who dropped the $20 on the ground in the first place is $20 poorer. No wealth was generated. When a production company from another state spends $1,000 in Missouri, the money is not created out of thin air; it’s $1,000 that the company would have otherwise spent in a different state.

When states regard each other as antagonistic economies, it is a mutually detrimental situation. Targeted incentive programs result in dead-weight loss and restrict overall growth. In order to increase overall economic growth and prosperity, Missouri should focus on the activities for which it has a comparative advantage, and then trade amicably with the states that have a comparative advantage in producing films.

There’s another reason it’s a bad idea to regard this out-of-state spending as “found money”: Missouri doesn’t get to keep 100 percent of it. States that offer film production incentives get a raw deal, because they are poorer by the amount of money that they allocate in tax credits. For every $1,000 that a film production company spends in Missouri (up to the cap), the state economy only keeps $650. In other words, Missouri government pays the film company $350 for every $1,000 that it spends here. Raising the cap, as Hunt supports, would exacerbate this loss.

The post The Lesson Applied to Film Production Incentives appeared first on Show-Me Institute.

A plan pushed by Rep. Mike Bost, R-Murphysboro, could bolster a core of his district’s economy. Bost wants to create a fund that would go toward improving the region’s wine industry.

He’s proposing to divert a portion of the revenue from the excise tax on wine, and reinvest it in the industry. It’s classic rent-seeking behavior. He also uses the copycat argument (i.e, “other states are doing it, so mine should, too”) that many legislators use to justify production incentive programs for their favored industries.

“This is not anything that hasn’t been done in other states,” Bost said. “That is why the state of Missouri has grown its wine industry so well, and it’s because they are able to do this.”

Although it is true that Missouri provides assistance to wine producers, it does this in a manner that’s different than the one proposed in Illinois. Rather than diverting excise tax revenue, Missouri provides a generous tax credit to wine producers.

Using the “Show Me: Tax Credits” web tool, I discovered that Missouri has awarded $5,736,848.39 under the Wine and Grape Tax Credit during the past decade. The largest recipient, Stone Hill Wine Company, received a combined sum of $2,005,629.22 from 2002 through 2004:

Trend Wine and Grape Tax Credits Awarded in Missouri by Vendor

First and foremost, I disagree that a state should rely on tax credits to attract businesses. A state is better off if it has businesses that are self-sustaining, not reliant on government assistance.

That said, however, I prefer Illinois’ proposal to Missouri’s Wine and Grape tax credit program because it places the burden of the subsidy on users rather than on non-users. In Missouri’s program, all taxpayers in the state pay for the subsidy. In the Illinois proposal, only those who consume the product are assessed. It’s a user-fee system that’s analogous to the way in which gasoline taxes and tolls fund highway maintenance.

Additionally, it’s fallacious to expect that the production and consumption should be equal within the state. States like Missouri and Illinois should focus on the activities that they do best, and then realize the benefits of free interstate trade. If Illinois were serious about maximizing its wine consumption, it would specialize in some other type of production that it can do more efficiently, and then trade with another state that has a comparative advantage in producing wine.

Critics of the Illinois proposal are correct to state that the money being spent on wine production cannot be spent on other programs, such as education. However, the same can be said of the money that Missouri taxpayers spend via the wine and tax credit. No matter how it is routed, taxpayers are going to be poorer by the amount of the subsidy.

The post Rent-Seeking Behavior in the Illinois Wine Industry appeared first on Show-Me Institute.

First, it is more than likely that the money spent by filmmakers via tax credits would have been spent anyway in the market, by private individuals. If a hotel hadn’t rented a room to a member of the film production crew, they could have rented it to somebody else. If the restaurant hadn’t seated the producers at a table, they could have given the table to another party. I think that it is fallacious to assume that, had it not been for the tax credits, these Missouri resources would have been unemployed.

McCarty writes:

Harbin also misses the fact that the movie industry is nontraditional.

Saying that something is a fact does not make it a fact. The only thing that makes an industry like filmmaking “nontraditional” is the fact that the government has intervened to such an extent that it has distorted the market. Health care is another industry that is often described as nontraditional, but as I have described previously on this blog, health care is subject to the same market mechanisms as any other industry.

McCarty also writes:

Lastly, Harbin mentions that it may be better for Missouri to leave the filmmaking to other film states “like California.” She may not know this, but California found itself weakened between 1998 and 2000. Between those years, the U.S. lost $10 billion worth of film productions to Canada, which passed film tax incentives. Southern California alone lost about 35,000 jobs due to the shift to Canada.

It makes economic sense that California would produce fewer films because it had to compete with states and other countries. Filmmakers like Jason Reitman are smart businesspeople, and they will go wherever they can get the best deal. I disagree that this refutes my statement that Missouri shouldn’t feel that it has to compete with other states for filmmaking, however.

Michigan has pursued the filmmaking industry particularly aggressively, and its state legislature is already discussing repealing the program. Missouri would be smart to specialize in producing according to its comparative advantage (i.e., in products that aren’t filmmaking), and then realize gains from trade with those states. Missourians will still be able to enjoy the benefits of the product (i.e., film), and at a much lower cost (i.e., the price an admission ticket at a movie theater vs. the price of subsidizing the production).

As another advantage of producing according to its competitive advantage, Missouri would have an opportunity to differentiate itself. Instead of producing the same products and services as other states do, Missouri could produce the goods and services that are uniquely Missourian.

Furthermore, McCarty did not dispute my argument that targeted tax credits hurt businesses in non-favored industries. By providing special advantages to a select industry, targeted tax credits force everyone else in the market to compete at a disadvantage. In a previous blog post on Show-Me Daily, Dave Roland explains this better than I do:

True economic development happens best when governments allow businesses to compete on a field that offers no special advantages to any of the players. The government does a grave disservice to its citizens when it assumes the responsibility for picking winners and losers in the market, rather than letting businesses succeed or fail on their own merit.

Another argument of mine that McCarty does not address is the one relating to the supreme opportunity cost associated with film tax credits. What else can Missouri do with this money? What is so special about the film industry, in contrast to other industries? Why doesn’t Missouri target hog farmers or economic research analysts or education or infrastructure?

Maybe in a couple of years, each state in the union will offer tax credits that are targeted to filmmakers, thereby negating the artificial comparative advantage that currently exists in states like Missouri. I can only hope.

The post A Rebuttal to Ray McCarty’s Rebuttal appeared first on Show-Me Institute.