House of Cards or Race to the Bottom?

While the series ‘‘House of Cards’’ depicts politics as a deeply corrupt charade in which key players scheme and backstab behind the scenes to get their way, recent developments in Annapolis depict a simpler reality: lawmakers will give you money if you publicly threaten them. The Maryland Senate  voted overwhelmingly (45 – 1) to increase the amount of tax breaks available to film productions  in Maryland after the makers of “House of Cards” threatened to take their stage sets elsewhere. If the House knuckles under too, this would be the second time in as many years that Maryland has increased these subsidies in response to such threats. Lawmakers ought to get some backbone and consider a more stable and long-term approach to economic development in the state.

In 2011, the General Assembly enacted a system of tax credits that allows the Department of Business and Economic Development (DBED) to award a maximum of $7.5 million in credits each year to film productions. This system was scheduled to expire on June 30, 2014. But in last year’s legislative session, state lawmakers extended the sunset date through Fiscal Year 2016 and increased the amount of tax credits available for fiscal year 2014 to $25 million. They did so in an effort to keep “House of Cards” and another show filmed here, “Veep,” which threatened to move production to an unnamed other state with more generous tax credits.

Following last year’s extension, the tax credits were set to return to $7.5 million after FY 2014, but just last weekend, “House of Cards” star Kevin Spacey schmoozed with state lawmakers at a private event in Annapolis to woo the General Assembly into increasing the amount of film tax credits yet again, to $18.5 million in FY 2015 and $11 million in FY 2016. This charm offensive was complemented by a major threat: The show’s maker, California-based Media Rights Capital, refused to resume filming until Maryland ponied up higher tax credits.

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Proponents argue that film tax credits are a good investment for Maryland because they generate more economic value than they cost as film companies hire local businesses and vendors. Others, such as the Maryland Film Office, contend that sustained investment in the film industry will attract other production firms to Maryland.

However, boosting the tax giveaways each year in response to threats from film companies is not a sound or sustainable policy. House of Cards spent just 53 days filming in Maryland in FY 2012 and 130 days filming in FY 2013. And no show, no matter how successful, lasts forever.

These threats themselves are evidence that states cannot count on the film industry as a long-term engine of economic development. Currently, 45 states and Puerto Rico offer film tax credits of some kind, and production companies will always be able to play states off against one another in this way. Maryland should make sound investments in its economy, but it should not do so in a race to the bottom with other states, fighting to see who can give the biggest tax breaks to film production companies. Besides, not all states are successful in their efforts to boost their economy via film tax credits.

Organizations as diverse as  the Center on Budget and Policy Priorities (CBPP), The Mercatus Center, the Tax Foundation, and Maryland’s own Department of Legislative Services argue that the primary beneficiaries of these tax credits are companies based outside of Maryland.  CBPP also points out that the best jobs often go to out-of-state residents.

The money spent on tax credits for film companies could be better spent on public services and investments in health, education, and transportation that would build a stronger, longer-lasting economic foundation for the state. Film tax credits actually remove funding from the state’s General Fund, the Higher Education Investment Fund and the Transportation Trust Fund, which will also result in less highway user revenues for local governments, as the Department of Legislative Services points out. DLS adds that only a portion of the tax credits  are recaptured in state and local revenues.

These industry-specific credits add up. Last week, we highlighted a report on how some Fortune 500 companies are able to avoid paying state taxes. One way they do so is clever accounting, but another is through targeted tax breaks like the film tax subsidy.

Maryland’s experience with “House of Cards” shows that it cannot win the film subsidy war. After coming into the state knowing the legal limit on film tax incentives and after receiving $31 million already, the show’s maker nonetheless threatened –in a letter to Governor O’Malley – to “break down our stage, sets and offices and set up in another state” unless Maryland increased its film tax credits. It makes sense for Maryland to invest in economic development, but the state should do so in an equitable way that plans for the long-term rather than responding to the annual threats of film production companies. 

EPI Report Shows MD Offers Better Climate for Workers than Many States, But Challenges Remain

Today, the Economic Policy Institute released a report describing actions in state legislatures across the country that have been detrimental to the ability of residents with moderate and low incomes to earn a decent living. EPI describes how this policy agenda has been financed by corporate interests and serves to drag down wages, lower labor standards, and erode employee protections for union and nonunion workers alike.

Fortunately, many of the most harmful developments outlined in the report - including laws restricting the minimum wage, removing regulations on child labor, and imposing new limits on benefits for the unemployed – have not taken place here. Rather, Maryland has enacted policies that improve the economic security of residents. These efforts include protecting Marylanders from catastrophic health expenses by implementing the Affordable Care Act and expanding Medicaid as well as providing tax credits and job training for workers through the state’s EITC and EARN Program.

However, Maryland needs to continue to enact policies that provide economic opportunity and overcome challenges to doing so. For example, EPI’s report notes that corporate lobbies have successfully defeated efforts to establish paid sick leave in cities and states across the country, including Maryland. In the coming legislative session, state lawmakers have the opportunity to enact paid sick leave as well as join other states across the country in raising the minimum wage. In this regard, EPI’s report serves as a useful reminder that the policies that provide security and opportunity for Maryland’s workers must be protected from those that seek to undermine them and that citizens and policymakers must continue to push for measures that help raise the living standards of all Marylanders.   

Sales Tax Modernization for Maryland

Last week, the Center on Budget and Policy Priorities published a new report, "Four Steps to Moving State Sales Taxes Into the 21st Century," that urges states to modernize their sales taxes in order to broaden their tax bases and increase revenues. 

The Center suggests states adopt four general tactics to achieve this goal:
     1.   Tax more services. 
When the state established a sales tax in 1947, goods made up 60 percent of household receipts. Today, goods weigh far less in the share of total consumption; households spend almost 68 percent of their budgets on services, most of which are not subject to the 6 percent state sales tax. 

Source: Center on Budget and Policy Priorities

According to an earlier report by the Center, if Maryland taxed all household purchases of services other than health care, housing, education, legal, banking, public transit, insurance, and funeral services at the same rates they tax tangible goods, the total revenue yield could amount to more than $2 billion per year. 

In the 2012 session, Delegates Hixson and Gilchrist introduced HB1051, which would have expanded the definition of "taxable service" to include personal services such as motor vehicle maintenance and repairs, parking, barber or beauty services, tanning,saunas, and shoe repair. It would have also taxed several business-to-business services, such as  tax preparation, business brokerage, and personnel supply services. MBTPI generally supported the bill's goal of recalibrating the sales tax system to cover a broader range of services but advised that the bill be amended to exempt from taxation 

services that are principally purchased by businesses. However, this legislation did not make it out of committee, so new action in future sessions would be required to broaden the tax base in this way.

     2.   Tax tangible goods purchased online.

Online purchases make up a significant portion of Maryland consumer spending, and very few of these transactions are taxed. According to a study by the state Comptroller, "In 2010, Maryland lost an estimated $198.4 million in sales and use tax revenue from the sale of tangible goods by remote sellers, which represents about 5.4 percent of gross sales tax collections." 

Federal legislation has been introduced that would enable all states to require online retailers such as Amazon and Ebay to collect sales tax on online purchases. The bill known as the "Marketplace Fairness Act" passed the Senate in May but awaits an uphill battle in the Republican-controlled House. In the meantime, several states have passed their own legislation to reach this end, most notably New York with its so-called "Amazon law." Maryland's legislature has so far yielded to Congress to address the issue at the national level. Maryland's 2013 Transportation Bill dedicates some of the increase in sales tax that would result from a federal rule change to state transportation projects, but if Congress fails to pass new law, the state will raise its gas taxes further to meet its financial needs for these projects.

     3.   Tax digital downloads.

Maryland does not currently tax online downloads. The Comptroller's sales tax study estimated the foregone tax revenue from the sale of digital goods (such as online downloads of software, music, ebooks, and movies) amounts to roughly $5 million per year if these sales were taxed at a rate of 6 percent. The Governor proposed an initiative in the 2012 session that would have created a tax on these downloads, but it was rejected by the legislature. This could be an additional source of state revenue in the future. 

     4.   Eliminate the online hotel tax loophole.

Online travel agencies often do not collect the full value of hotel taxes owed to the state. A loophole allows these websites to apply the tax on the wholesale rate the travel firms pay the hotels rather than the higher retail rate that would be charged to a consumer who booked a room directly with the hotel. This difference amounts to at least $5 million foregone state revenue. No major legislation at the state level has been proposed to amend this practice.

Sales and use taxes are second only to the income tax as Maryland's largest sources of income and accounted for 28 percent of state revenue for fiscal year 2012. While sales taxes--like most consumption taxes-- tend to be regressive in nature, they are a more robust source of revenue for state governments than income taxes, declining less in periods of recession. 

Reforms that could enlarge and strengthen this key source of state dollars and bring sales tax into the 21st Century should be considered. However, the state should be sure to accompany any substantial broadening of the tax base with a robustly progressive income tax system and/or accompanying tax credits to help aid lower-income Marylanders who might be disproportionately affected by increases to their consumption tax burdens.

Film tax credits are ineffective

Image: Wpclipart.com

Legislators are considering a bill that would more than triple the state's film production tax credit cap to $25 million in fiscal year 2014. The bill would also extend authorization of credits up to the current level of $7.5 million through fiscal year 2016. Productions have to spend at least half a million dollars in Maryland to qualify. The credit was created in 2011.

Maryland, and Baltimore in particular, has received significant attention for the recent filming of HBO's Veep and House of Cards, the first production by Netflix. Supporters of the state film production tax credit argue that these high profile productions create jobs and improve the economy in ways that offset lost revenues. These benefits would be forfeited to states with better incentive programs if the credit is allowed to expire, they argue.

However, film production tax credits are problematic for a variety of reasons. The Center on Budget and Policy Priorities handily summarized the issue thus:

• State film subsidies are costly to states and generous to movie producers. ...Over the course of state fiscal year 2010 (FY2010), [forty three] states committed about $1.5 billion to subsidizing film and TV production...money that they otherwise could have spent on public services like education, health care, public safety, and infrastructure
• Subsidies reward companies for production that they might have done anyway. Some makers of movie and TV shows have close, long-standing relationships with particular states. Had those states not introduced or expanded film subsidies, most such producers would have continued to work in the state anyway. But there is no practical way for a state to limit subsidies only to productions that otherwise would not have happened.
• The best jobs go to non-residents. The work force at most sites outside of Los Angeles and New York City lacks the specialized skills producers need to shoot a film. Consequently, producers import scarce, highly paid talent from other states. Jobs for in-state residents tend to be spotty, part-time, and relatively low-paying work — hair dressing, security, carpentry, sanitation, moving, storage, and catering — that is unlikely to build the foundations of strong economic development in the long term.
• Subsidies don’t pay for themselves . The revenue generated by economic activity induced by film subsidies falls far short of the subsidies’ direct costs to the state. To balance its budget, the state must therefore cut spending or raise revenues elsewhere, dampening the subsidies’ positive economic impact.
• No state can “win” the film subsidy war . Film subsidies are sometimes described as an “investment” that will pay off by creating a long-lasting industry. This strategy is dubious at best. Even Louisiana and New Mexico — the two states most often cited as exemplars of successful industry-building strategies — are finding it hard to hold on to the production that they have lured. The film industry is inherently risky and therefore dependent on subsidies. Consequently, the competition from other states is fierce, which suggests that states might better spend their money in other ways.
• Supporters of subsidies rely on flawed studies. The film industry and some state film offices have undertaken or commissioned biased studies concluding that film subsidies are highly cost-effective drivers of economic activity. The most careful, objective studies find just the opposite.

Even the Tax Foundation agrees that film subsidies make little policy sense. Maryland should let the state film production tax credit expire at the end of this fiscal year, as scheduled.

Evaluating Tax Credits

Tax credits are in the public eye more and more these days, promoted as the way to get state economies back on track and grow jobs. Yet too often credits are not evaluated to see if they deliver on their promise.  Previously I blogged about a series of reports on tax credit evaluation from Good Jobs First.  Now the Pew Center on the States has released a report titled Evidence Counts: Evaluating State Tax Incentives for Jobs and Growth. 

Pew used four criteria to evaluate how well states evaluate tax credits:

• Are the evaluation results built into policy and budget deliberations?
• Are all major tax incentives evaluated regularly?
• Does the evaluation ask and answer the right questions using good data and analysis?
• Does the evaluation draw clear conclusions about the tax credit?

So, how does Maryland fare?  Not well.  Pew found that Maryland failed to meet any of the four criteria for good tax credit oversight.  Maryland thus fell into the category of states trailing behind national trends in evaluating tax credits. 

The General Assembly moved in the right direction this session by passing two bills improving oversight of tax credits.  The Tax Credit Evaluation Act (SB 739/HB 764) establishes a periodic review process for some tax credits, which sets a precedent for evaluating other tax credits in the future.  Senate Bill 1086 (HB 1456) requires taxpayers claiming certain business tax credits to do so electronically, thus making oversight and data analysis easier for the Comptroller's office and others.  MBTPI supported both bills, and both now await the Governor's signature.

DBED audit highlights need for tax credit accountability

A legislative audit has found serious problems with programs managed by the Maryland Department of Business and Economic Development (DBED).  The audit found that:

• DBED did not require eight companies applying for the One Maryland tax credit to document costs that serve as the basis for the amount of credit awarded.  Total tax credits awarded equaled $34 million.
• DBED investment agreements contain provisions to force repayment plus interest if companies leave Maryland within five years of the state investment.  Yet DBED failed to follow up when the recipient of a $250,000 investment in 2008 left the state one year later.  The audit estimated that the amount owed the state now totals $325,000.  After the legislative audit raised the issue DBED sent the company a letter demanding repayment.
• Internal users of DBEDs financing programs tracking systems were not adequately restricted.  Some DBED employees had access to many actions, such as bill initiation and payment processing, which were outside the scope of their responsibilities.  Disturbingly some former employees still had access up to 20 months after they left DBED.  The department corrected security permissions once they were brought to its attention.
• DBED did not collect required expenditure and performance reports from all grantees.  Consequently, the state does not know if the funds were used for their intended purposes.  Grantees may well be in compliance with the terms of their grants, but DBED has no way of knowing in many cases.

Encouragingly, DBED’s response to the audit (included as an appendix to the report) was generally positive.  They agreed with the auditors findings and, as noted above, took immediate action in several cases. 

MBTPI supports the Tax Credit Evaluation Act (SB 739/HB 764), because Marylanders deserve to know what they are getting for their tax dollars.  Unfortunately, this audit highlights the need for continued oversight to make sure that existing and new regulations are properly followed.

What does Maryland get for its tax credits?

That’s the question Senator Richard S. Madaleno Jr. and Delegate Bill Frick want the General Assembly to ask.  On Tuesday, Senator Madaleno introduced the Tax Credit Evaluation Act, and Delegate Frick will introduce the House version shortly.

The legislature examines normal expenditures every year through the budget process. Tax credits—sometimes called tax expenditures because they cost the state money in terms of lost revenue—are seldom revisited once established.  Yet there are more than 300 tax credits available in Maryland.  I blogged about this issue previously in December (Money for Something?) and January (Maryland subsidy programs score B- in national study). 

The Tax Credit Evaluation Act (SB 739) would require the President of the Senate and Speaker of the House to appoint a committee to review most tax credits every five years on a rotating schedule.  Each tax credit would be evaluated based on five criteria:

1. the purpose for which it was established,
2. whether that purpose is still valid,
3. whether the credit is meeting its objectives,
4. whether the intentions of the credit could be better met through alternative mechanisms,
5. and the administrative and lost revenue costs to the state.

The committee’s final report to the General Assembly would recommend specific action on the tax credit (renew, modify, allow to expire), as well as any legislation needed to accomplish the recommendations.  Without affirmative action by the legislature, the tax credit would then expire.

The bill covers tax credits that the Institute supports, like the Earned Income Tax Credit, not just credits that benefit specific businesses and industries. We believe that these credits will withstand fair scrutiny, and that regular reviews will only result in their expansion and improvement.

The Tax Credit Evaluation Act would establish a review process for tax credits that is sorely needed in Maryland.  This is doubly true at a time when revenue shortfalls threaten vital services.  The principles of good governance and due diligence with the people’s money make this a no-brainer.  MBTPI supported this bill last year, and we support it again this year.