In fact, the TCRC’s new recommendations actually kick the tax credit reform can even further down the road, presenting an even less ambitious reform proposal than it did in 2010. Among other things, the TCRC recommended higher caps than it did just two years ago on giant fiscal violators such as the Historic Preservation Tax Credit program. Missouri’s tax credit disease has become worse over the last two years. In response, the TCRC has recommended . . . dialing down the reform dosage from its previous reform prescription.

What a disappointment.

That does not mean that nothing worthwhile came from the TCRC, or at least, despite it. Based in part on commission member Craig Van Matre’s early draft report, eight commission members also produced a blistering minority report. That report actually cites free-market luminaries such as Frederick Hayek and Henry Hazlitt for intellectual support and takes a rhetorical hammer to the state’s tax credit woes. That report is embedded below.

It really would have been something if the TCRC had adopted the minority report rather than retrenched the tax credit status quo. Sadly, the body on the whole took the tax credit debate in precisely the wrong direction.

Minority Reportbycertainmembersofthetaxcommission dec2012 FINAL (Text)

The post MUST READ: The Minority Report From The Tax Credit Review Commission appeared first on Show-Me Institute.

It appears that the company figured out how to secure tax credits from the state government without increasing the level of employment. Ford is sending one line to Kentucky, but it is starting a new line in Kansas City. Although the number of jobs will remain constant, the company will continue to receive financial assistance from the state. Failing to deliver on promises, in terms of job creation and economic activity, is unfortunately a pervasive problem in Missouri. From an article in the Kansas City Business Journal:

The automobile side of the Kansas City Assembly Plant will cease production sometime during the fourth quarter of 2011, soon after the Louisville Assembly Plant in Kentucky begins production of the next-generation Ford Escape.

The effect on the 3,700 hourly employees in Kansas City remains unclear. However, Missouri state officials seem to expect some downtime at the Kansas City Assembly Plant in Claycomo, Mo., creating an opportunity for a big retooling in preparation for a new product.

Ford has a long history of pitting states against each other, so this news is not particularly surprising. The company has a pattern of securing millions in incentives from state governments, then shutting down operations and leaving the state unless it can secure additional incentives. Taxpayers, of course, are left to pick up the tab.

Don’t forget that the state of Michigan issued $909 million in incentives to Ford in October.

I find it disconcerting that the state government has a working relationship with the company in its operations. According to a statement from Gov. Jay Nixon’s office:

We have been working closely with senior Ford officials for months to make sure the vehicles of the future are manufactured at the Claycomo plant, and it’s clear that our hard work will pay real dividends for Kansas City and suppliers in communities across Missouri. We look forward to putting the finishing touches on this agreement in the coming weeks. Automotive manufacturing has a bright future in the Show-Me State.

Government officials can attempt to anticipate what the most efficient solution to a given problem will be — but, in all likelihood, they will get it wrong. This is because no individual has access to perfect information. As the Show-Me Institute’s editor Eric Dixon explained in the comment section of a recent post, the likelihood that an individual is wrong increases as he becomes further removed from the decentralized feedback loops that markets provide. Nixon and state policymakers are too far removed from the business of manufacturing vehicles to know the optimal state of the market. Missourians would be better off if the state government stayed out of this particular market, and instead allowed market forces to work.

This reminds me of the following concept that Henry Hazlitt describes in Economics in One Lesson. I cite this classic work frequently because it relates to many public policy issues in Missouri. I referenced this passage in a recent post in which I argued that government non-intervention is the optimal job creation strategy. Hazlitt wrote:

When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to be invented. Instead of thinking only where bridges must be built, the government spenders begin to ask themselves where bridges can be built.

Would the Claycomo plant stay open in the absence of the subsidy from the state of Missouri? If it would not, then the plant is, essentially, an invented project that is maintained because it can be, rather than because it satisfies a market demand. The fact that the new line has yet to be determined makes me wonder whether the project is in the process of being invented.

The post Encouraging Job Creation in Claycomo, Mo. Louisville, Ky. appeared first on Show-Me Institute.

This is a message that he has communicated frequently of late. From an article in the Missouri Watchdog:

New state Sen. President Pro Tem Robert Mayer, a Republican from Dexter, said discussion on tax credits “needs to happen.” But when pressed on how soon that discussion would take place in the upcoming session of the Missouri General Assembly, Mayer demurred.

“First, we need to get to work on job creation and see what we can do there,” Mayer said.

Government programs that are intended to induce job creation and economic activity have negative unintended consequences, such as crowding out private investment. This is a concept that Henry Hazlitt discusses in his classic work Economics in One Lesson, a book that I encourage policymakers in Missouri to read. Even though the book was first published more than 60 years ago, at present the lesson it teaches is no less relevant:

When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to be invented. Instead of thinking only where bridges must be built, the government spenders begin to ask themselves where bridges can be built. Can they think of plausible reasons why an additional bridge should connect Easton and Weston? lt soon becomes absolutely essential. Those who doubt the necessity are dismissed as obstructionists and reactionaries. […]

[The bridge] is what is immediately seen. But if we have trained ourselves to look beyond immediate to secondary consequences, and beyond those who are directly benefited by a government project to others who are indirectly affected, a different picture presents itself. It is true that a particular group of bridgeworkers may receive more employment than otherwise. But the bridge has to be paid for out of taxes. For every dollar that is spent on the bridge a dollar will be taken away from taxpayers. If the bridge costs $1,000,000 the taxpayers will lose $1,000,000. They will have that much taken away from them which they would otherwise have spent on the things they needed most.

Therefore for every public job created by the bridge project a private job has been destroyed somewhere else. We can see the men employed on the bridge. We can watch them at work. The employment argument of the government spenders becomes vivid, and probably for most people convincing. But there are other things that we do not see, because, alas, they have never been per­mitted to come into existence. They are the jobs destroyed by the $1,000,000 taken from the taxpayers. All that has happened, at best, is that there has been a diversion of jobs because of the project. More bridge builders; fewer automobile workers, radio technicians, clothing workers, farmers.

Basic economic forces, not government programs, determine job creation. Only by getting out of the market can the government truly further its goals of job creation and productive economic activity.

In his comments, the senator sets up a false choice between job growth and tax credit reform. Job creation will occur when the overall cost of doing business in the state decreases, and this can be partially accomplished by reining in tax credits and widening the tax base. Once employers don’t have to subsidize other companies or prop up entire industries with their tax monies, they will be able to hire more people and grow their businesses.

The post The Best Job Creation Strategy? Government Non-Intervention appeared first on Show-Me Institute.

The following passage from Economics In One Lesson, by Henry Hazlitt, seems particularly relevant:

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 buy-able 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.

The editorial includes the following pie chart:

Source: St. Louis Business Journal

According to the explanation in the text:

The chart above shows where the money went in the $34 million Crown Village Redevelopment project using LIHTC and historic preservation tax credits.

The chart raises more questions than it provides answers. Does it indicate the actual amount or the projected amount of economic activity resulting from the specified project? Does it include direct expenditure by the state, or does it account for an economic multiplier? (And, if so, at what assumed rate?) How is it similar to or different from the breakdown of other projects, and of other tax credit programs? What was the duration of the project? Where did these jobs go when the project was completed and the subsidy ended?

Furthermore, were the workers in question unemployed before they were hired to work on the Crown Village Redevelopment project? If not, then the subsidy displaces economic activity that already existed in the private sector. If so, then the subsidy is another form of unemployment. Economist Russ Roberts discussed this in a recent post on Cafe Hayek:

Having them do nothing–either because the task is unproductive or because you simply give them a check with no strings attached–does not in and of itself create prosperity for anyone other than the people who get the check.

I have argued repeatedly that targeted development tax credits are a poor strategy for economic development, and that they have negative consequences in Missouri. For evidence, I encourage our readers to read an editorial, which recently ran in the St. Louis Beacon, in which I argued that targeted tax credit programs create an uneven playing field in Missouri.

The post Graphic in the St. Louis Business Journal Raises More Questions appeared first on Show-Me Institute.

I want to take this opportunity to present arguments against the claims that the author made, and also to explain how tax credits are undesirable policy for Missouri. The author of the editorial states:

The tax-credit program may need fine tuning, but it is too important for St. Louis and Missouri to scale back — especially in difficult economic times.

The state can least afford giving tax credits to select firms and businesses during difficult economic times. Tax credit programs place an additional burden on taxpayers who are already hurting in difficult economic times. I don’t know whether the author has heard, but Missouri is out of money! Many other programs compete for these funds, so the government and taxpayers face an opportunity cost equal to the amount of the tax credit. Additionally, because unredeemed tax credits represent a future liability, they will negatively affect a state’s ability to recover from difficult economic times when it has to dole out money at unexpected intervals in the future.

Tax credits are used as a powerful tool for economic development all across the state, not only creating a considerable number of jobs but also providing many social benefits.

According to a study of tax credit cost controls recently released by Missouri State Auditor Susan Montee, tax credits have less of an impact than predicted and cost more than anticipated. The report reviewed 15 major tax credit programs in Missouri, and found that the fiscal notes underestimated the total cost of the programs by $1.1 billion over a five-year period. For the historic preservation tax credit — the one for which the author specifically lobbies — the redemptions far exceed the estimated fiscal impact. From the audit report (emphasis mine):

[T]he fiscal notes accompanying Senate Bill 1 of the 1997 2nd Extraordinary Session, that established the historic preservation tax credit, estimated an annual fiscal impact of $14.3 million. The only other legislation impacting this credit through the 2008 legislative session was Senate Bill 827 in 1998 and the fiscal note for that bill indicated the impact of the statutory change was unknown. Based upon our methodology, the projected fiscal impact was $14.3 million annually and $71.5 million over the 5 year period, while redemptions totaled over $637 million.

This trend is not specific to tax credits for historic preservation; many other tax credit programs also fail to live up to their hype. For example, Missouri subsidizes the film industry with tax credits, but there have been fewer people employed in the industry since the tax credit program began.

Furthermore, targeted tax credits discourage economic development in the state by hurting 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. An uneven playing field is not an optimal economic climate for fostering development.

A particular program may provide some social benefits, but the state has to weigh this against the marginal cost of devoting money to a particular project. The state needs to consider those competing needs carefully, because resources are scarce.

Quoting again from the Post-Dispatch editorial:

The ability of tax credits to create jobs and generate economic activity has been recognized by some of our neighboring states. Kansas has removed its cap on tax credits, and Nebraska increased its cap by $30 million.

If all of the other states jump off a bridge, should Missouri jump, too?

The great thing about the state system is that they function as living laboratories. Policymakers can observe the effects of policies in other states, determine whether they are successful, and decide whether these policies should be incorporated into their own states. Observing the effects of tax credit programs reveals that they do not result in their stated purposes, and spending more on them is unlikely to result in better outcomes.

Tangentially, a big downside to the editorial is the author’s lack of focus; he talks about tax credits for historic preservation in places, then talks about general tax credit programs in others. In the above quotation, the author seems to speak of tax credits in general, although this is unclear. In reality, Missouri issues more tax credits for historic buildings than any other state in the nation. Virginia issues the second most, but spends only half as much on them as Missouri.

But many of these developments would not be feasible without tax credits. […] The Washington Avenue loft district would not have happened without the tax credit program. […] The renovation of the Chase Park Plaza complex would never have taken place without the historic preservation tax credits. Tens of millions of dollars were invested in the project. […] Without the credits, significant private investment [in the Forest Park Southeast neighborhood] would not have been made.

Here, the author fails to consider the direct and indirect consequences that may have come into existence had the taxpayers of Missouri been allowed to keep their millions. The Chase Park Plaza and a renovated historical building are easily seen effects; however, the products and services that would have otherwise been consumed in the private sector represent the unseen effects. The tens of millions of dollars that were invested in the Chase Park Plaza were taken away from taxpayers who would otherwise have spent it on the products and services that they needed and wanted most. As Henry Hazlitt explains in Economics in One Lesson, for every public job created by the Chase Park Plaza (or historic preservation on Washington Avenue), a job has been destroyed in the private sector. Development is easy to see, but the unseen includes the jobs that were destroyed because the money that would have funded them was appropriated for other uses.

At a news conference, Gov. Nixon acknowledged that the state tax credit program is used “for good and solid purposes.” Last year, he was even promoting the expansion of tax credits for businesses, claiming it was essential for Missouri’s economy.

Yes, but the governor has also called for tax credit cuts. As an illustration of his support for cutting tax credits, the Associated Pressed dubbed him “cutter-in-chief.” In this regard, the governor sends a mixed message.

[T]hey are not giveaways.

Tax credits operate by reducing the recipient’s individual or corporate income tax bills. By reducing the tax burden of a single targeted industry or company, if overall government spending is not also reduced by the amount of that credit, the marginal tax rate for everybody else increases. This shifting of the tax burden from one party to others is certainly a type of giveaway. In addition, the fact that many of these tax credits are transferable means that they can be sold on a secondary market. Consequently, tax credits can ultimately benefit individuals who have nothing to do with the rationale for their issuance.

Much has been made of the tax credits costing the state $585 million last year — up 57 percent since 2001. This only indicates the program is working well.

If the Missouri Department of Economic Development were successful in developing the economy, it would eliminate the need for its own existence. That obviously hasn’t happened. However, if by “working well” the author means creating a system of corporate welfare, then I agree.

But lost revenue can be made up many times more by economic activity not otherwise generated. This means additional tax dollars for schools and essential services.

Tax credit programs are growing at a much faster rate than the state’s revenues, as communicated in the Missouri state auditor’s report on tax credits. This is not a sustainable trend, because continuing at this rate would eventually lead to the state issuing more money in tax credits than it takes in as revenue. From fiscal year 2001 to fiscal year 2009 in the state of Missouri, tax credit redemptions increased by 57 percent, while net general revenue fund collections increased by only 15.7 percent.

Additionally, many of these tax credits include property tax abatements, which means that the local and state government will receive no tax revenue from the new business. The new IBM service center in Columbia is a recent example.

The post Tax Credits Are an Undesirable Strategy for Missouri 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.

Speaking in favor of the tax increase, Mayor John Nations of Chesterfield said that the details of plans for future expansion are contingent on the availability of funds from the federal and state government. Speaking in opposition of the tax increase, John Burns of Citizens for Better Transit noted that MetroLink’s plans do not stipulate where and when a project would be built, and that a “plan” needs to answer these questions before it can really be considered a plan.

This difference strikes me as an application of the following passage in Economics in One Lesson, “Public Works Mean Taxes,” by Henry Hazlitt:

But a bridge built primarily “to provide employment” is a different kind of bridge. When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to be invented. Instead of thinking only of where bridges must be built the government spenders begin to ask themselves where bridges can be built.

Public works projects are acceptable when they serve an actual purpose. However, successfully securing funds from the federal or state government does not constitute an actual purpose. This is a concept on which John Burns, Henry Hazlitt, and I appear to agree. If they are to be economically productive, such expenditures must fulfill a need other than diverting creating jobs — or, as Mayor Nations said during the debate, “providing an economic engine for the region.” At the very least, a plan should include basic information such as when and where a public works project will be built. Otherwise, it’s another proverbial “bridge to nowhere.”

The post Building a Light-Rail System to Nowhere 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.

The discretionary program offers state tax credits, accompanied by local real property tax abatement, for businesses that meet criteria such as adding jobs. […]

Ipock said state tax credits will only be allowed for qualified businesses and are geared toward industrial development.

Businesses that are ineligible to receive the tax credits include gambling establishments, adult businesses, retail trade, educational services, religious organizations, public administrators, food and drink establishments.

I disagree that the program’s benefits should be for “qualified” businesses. This is the same as the fundamental argument against targeted tax credits, like those to filmmakers. The government should not have the authority to pick and choose which businesses can operate in its borders. These programs create inequality because they force businesses that aren’t “qualified” to compete at a comparative disadvantage. This consequently encourages corruption, because it gives businesses an incentive to solicit the government for special treatment.

Instead, Webster County should focus on creating a favorable tax environment that would benefit all businesses equally, such as reducing commercial property tax surcharges and repealing mandates. If the city of Saint Louis were toying with such an idea, I would recommend that it repeal the earnings tax instead.

I also disagree that the focus of the program should be on job creation. Public works projects, such as Enhanced Enterprise Zones, encourage nonproductive work (e.g., “work for works’ sake”). I think that Milton and Rose Friedman would agree; in Free to Choose: A Personal Statement, they write:

If all we want are jobs, we can create any number—for example, have people dig holes and then fill them up again or perform other useless tasks.

Furthermore, although the program may be successful at attracting the targeted industries, any activity that it generates will be discounted by the amount of the economic incentives that it takes to attract it. As Henry Hazlitt explains in Economics in One Lesson, spending in the private sector destroys jobs in the private sector. This is because public spending is financed by money that is taken from taxpayers, who can’t spend this money on products and services in the private sector that would generate productive economic activity.

When providing employment becomes the end, need becomes a subordinate consideration. “Projects” have to be invented. Instead of thinking only of where bridges must be built the government spenders begin to ask themselves where bridges can be built.

The post Enhanced Enterprise Zone in Webster County appeared first on Show-Me Institute.

My recent op-ed against film tax credits was published as a guest commentary in the Columbia Missourian today! As regular readers of this blog will know, it was also discussed by Steve Walsh on MissouriNet and by David Nicklaus on Mound City Money last week.

Over the weekend, I thought a lot about the arguments that were raised in favor of the film tax credit program. I’d like to take this opportunity to respond to them.

(1) The debate over the appropriateness of film tax credits is a natural application of the general principle of the parable of “The Broken Window” by Frédéric Bastiat (1850), which was later developed in Economics in One Lesson by Henry Hazlitt (1946).

I am impressed with the sheer amount of commentary generated by my recent blog posts arguing against film tax credits in Missouri. I have heard from people who worked on the Up In the Air set, professors of film, and representatives of the Missouri Film Commission, among others. In his book Economics in One Lesson, Hazlitt explicitly warns that this will happen (emphasis mine):

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 paraphrase Bastiat and Hazlitt, government should consider ce qu’il voit et ce qu’il ne voit pas au même temps when it is deciding policy. In plain English, this means that it should consider “the big picture” instead of only one group of people when forming policy that affects everyone. Hazlitt thinks that this concept is so important that this is his “one lesson,” further reduced to a single sentence (emphasis mine):

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Here’s how this relates to the film tax credit program. If we only consider that which we see, ce qu’on voit, then the tax credit programs are considered to benefit everyone. The recipients of the tax credits do assuredly benefit, as they testify in their commentary (Econdiva provided an estimate that the producers of Up in the Air spent nearly $12 million in the state). Bastiat and Hazlitt warn that it is dangerous to ignore the hidden costs, ce qu’il ne voit pas, that affect everybody. Missouri should not focus solely on the benefits of bringing filmmakers to Missouri and ignore the cost of the program to taxpayers.

While certain public policies would in the long run benefit everybody (e.g., eliminating the earnings tax or commercial property tax surcharges), other policies would benefit one group only at the expense of other groups. Film tax credit programs fall into the latter category. When tax revenue is spent on film productions, taxpayers cannot spend that money in alternative ways, such as education or infrastructure; they face an opportunity cost that is equal to the amount of the subsidy.

(2) There is not enough demand in Missouri for the film industry to exist in Missouri without a considerable level of government assistance.

In their comments, both Cat Cacciatore and Dave Rutherford provided proof of this point — they both travel out of state because there isn’t enough demand for film production work in Missouri (even in today’s status quo, in which we offer a $4.5 million tax credit). If an individual decides to live in a location in which there is not enough demand for him to work full-time, why should the taxpayer have to subsidize his employment?

Let’s say that I am a trained lobster farmer and I choose to relocate to Missouri, which is at a competitive disadvantage for lobster farming because it is very far from the ocean. I have two options: (1) I can petition the government to subsidize my employment; or, (2) I can transfer my knowledge, skills, and abilities to an industry for which there is demand. I believe that the second option is better because it does not burden taxpayers.

Most Missourians work in industries that don’t have targeted tax credits. Their jobs exist because there is enough demand for them. The demand for bakers, babysitters, yoga instructors, doctors, lawyers, and free-market research analysts in Missouri is high enough so that their employers choose to pay for their jobs without government assistance.

Furthermore, if the state stops subsidizing these jobs, then it has more workers available to do other kinds of work. In the comments, Josh Smith notes that:

There is not some fixed “pool of jobs” which can only be expanded by spending tax dollars in the right way. There are many different types and amounts of work that can be done to earn a wage, specialization and trade tend to lead to a more efficient economy.

(3) The $4.5 million applies to state tax revenues, not total expenditures.

I realize that there is some confusion here, and I admit that I should have stated this more clearly in my op-ed. State tax revenues and total expenditures are different numbers. To an out-of-state production crew like Reitman’s, Missouri issues a tax credit to for up to 30 percent of the amount that they spend in state. This means that they get $3 million back if they spend $10 million in Missouri (which they can turn around and sell, because these tax credits are fungible). Given the low multiplier for the film industry (described herein), there is no way that the state would be able to recover that amount of money, whether it be through sales taxes (4.225 percent) or personal income taxes.

(4) These programs do not result in permanent economic activity.

As Sarah Brodsky points out, the purchases cited are single-time expenses (e.g., $30,000 for ice, $185,000 for set dressing items). Few permanent jobs, if any, are created when a filmmaker comes in to the state, works on a film for a finite period of time, and then goes back to California.

Additionally, according to “The Economic Impact of the UK Film Industry,” a 2007 study by Oxford Economics, the film industry has a multiplier of only 2.0. This is lower than the multiplier for the economy average, and indicates that the indirect impacts on employment and output from the film industry are not very far-reaching.

(5) Missouri should leave filmmaking to states that have a comparative advantage in it.

Why is it important that Missouri try to compete in the national or global marketplace in filmmaking? I disagree that states like Missouri should focus on developing industries for which they are at a competitive disadvantage. Missouri would be better off if it focused on the products and services that it produces best (e.g., Budweiser beer, hog farming, mining limestone, manufacturing) and then traded with other states. I agree with Josh Smith that the statement “Other states are doing it, so Missouri should too” is an insufficient reason. He observes:

If other states want to spend their residents’ tax dollars to attract filmmakers, and the result is that Missourians (1) are still able to get the benefits of the product by paying to see the movie (perhaps more cheaply if the tax credits are spent in making the film more affordable, whatever that might mean) and (2) don’t have to spend our tax money to entice the film’s production to locate here then we have a few obvious benefits.

Also, the Michigan economy is in terrible shape! Why would Missouri want to model its tax policies after Michigan’s, even when legislators there are already discussing discontinuing the program? Right now, Michigan has a unemployment rate of 15.3 percent, which is the highest in the country. (By comparison, Missouri’s current unemployment rate is 9.5 percent, which is below the national average of 10 percent). Even before the recession sharpened, Michigan had the highest rate; in September 2008, it was 8.9 percent.

As its comparative advantage, California has more sunlight than the Midwest, which allows for longer shooting hours, as well a variety of landscape types within driving distance, which can stand in for locales around the world. (Remember how Austin Powers remarked, “You know what’s remarkable? That England looks in no way like Southern California!” while driving on an “English” country road in Austin Powers: The Spy Who Shagged Me?)

(6) Subsidized industries have difficulty weaning themselves off government assistance.

When a state coddles an industry that does not have a competitive advantage (a so-called “infant industry”), the industry tends to remain dependent on that aid. Industries that are subsidized are not subject to the same competitive pressures as those that are unsubsidized, and they consequently do not have an incentive to innovate. In “The Case For Free Trade,” Milton and Rose Friedman describe some additional negative implications of these infant industries.

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.

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This lesson is further validated by economist Henry Hazlitt, who believed that many of the economic fallacies in the world today stem from one or two issues: Looking only at the immediate consequences of an act or proposal, or looking at the consequences only for a particular group — to the neglect of others.

Today’s economic lesson is about the St. Louis Board of Aldermen and its proposal to limit payday loan stores in the area, as reported by the Post-Dispatch. Payday loans are short-term loans that are intended to cover borrowers’ expenses until their next pay period. According to many consumer advocate groups, payday loan stores are predatory — they prey on uninformed consumers and dish out loans with a vague screening process, making it easy for any Joe Six Pack to take out a loan.

Personally, I can’t stand them. Payday loan stores can take people who are already in an economic hole and turn their situations into economic craters. In spite of this, the stores represent a last resort for people who operate with little or no economic safety net. Let’s not forget, there is a market out there that really can take advantage of payday loans. Eliminating stores removes market competition, so that stores still operating end up offering even less favorable terms, or more restrictive screening. This would put those consumers in an even bigger bind. In the Post-Dispatch article, Tom Linafelt, a spokesman for Quik Cash, even stated, “Laws to restrict the opening of new stores actually help companies like his because they lessen competition.” Unfortunately, this guy is right.

Justin Hauke, a former Show-Me Institute policy analyst, wrote a piece on this topic back in 2007. Rather than pass new regulation, legislatures should get to the root of the financial problems surrounding payday loans, by encouraging programs that increase financial literacy (preferably in high school) or that seek alternative sources of short-term financing — such as lines of credit, or credit unions. No matter what, Economics 101 teaches us that we should look past the immediate consequences of an act, or the consequences for a particular group, so that we don’t neglect others.

Way to go, class. You earned your sticker for today.

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