Filmmakers love the drama of a prisoner's dilemma. You've seen the plot device in dozens of movies: Two suspects in separate interrogation rooms simultaneously deciding whether to confess a crime.
Game theory teaches that both suspects would be better off staying quiet, but one person ultimately cracks. Something similar happens when film industry lobbyists come calling at the state level for tax credits and cash rebates.
States win the game only if they refuse to play, but Maryland has cracked over and over again to the tune of millions of dollars to woo productions like "House of Cards." Producers then laugh their way to the bank while states race to the bottom, outbidding each other in lose-lose scenarios. As a result, an entire cottage industry has emerged with websites showcasing the flavor of the month — the state with the latest concession or fire sale.
Maryland is one of 37 states in the mix, providing a refundable income tax credit for qualified costs of film and television productions. According to a September 2015 report from the state's Department of Legislative Services, Maryland has issued $62.5 million in tax credits over the past five years.
But rather than functioning as a special enticement, these public funds get incorporated into the business model for a private industry. "What are the incentives?" is what every producer wants to know first when choosing a location, according to Maryland's Film Office director.
Proponents of the incentives argue that issuing rebates and tax breaks to film companies boosts the economy because production crews must stay in local hotels and eat in local restaurants. Advocates also argue that upticks in film productions lead to increases in tourism because movie and television buffs will travel to see where films and series are made.
Unfortunately, cracking under the pressure has consequences in a prisoner's dilemma. Spending tax dollars on productions or telling Hollywood companies they don't have to pay taxes means that Maryland has less revenue for more pressing needs like roads and schools. By spending public money on film incentives, states are sacrificing other, potentially more productive uses of taxpayer dollars.
Consider the cost of film incentives to Maryland. The state recouped just 6 cents in state revenue for every dollar it issued in tax credits over the past five years, or a loss of 94 percent.
Results have been similar in Massachusetts, where the state recouped just 13 cents in state revenue for every dollar it issued in film tax credits from 2006 through 2012. And in Louisiana, film production incentives had a negative impact of $168.2 million on the state budget in 2012 alone. These losses mean that film incentives are "investments" that do not even pay for themselves.
Evidence also shows that the primary beneficiaries of film incentives are out-of-state companies and individuals. In written testimony to the finance committee of the Alaska House of Representatives, Joseph Henchman of the Tax Foundation testified that "while some benefits accrue to in-state filmmakers and suppliers, on the whole (film tax credits) are a net transfer from taxpayers to out-of-state production company beneficiaries."
Moreover, the jobs created by film production are temporary. Catering companies, extras, local prop builders and so forth are employed only as long as production lasts. A film produced in Baltimore's Inner Harbor might provide local jobs for a while, but when production ends, so do the jobs.
Maryland would be wise to follow suit. The prisoner handcuffed to a chair, sitting at a metal table behind a one-way mirror, might be tempted to talk. But the best strategy for all states is to opt out.
Jacob Bundrick (email@example.com) is a policy analyst with the Arkansas Center for Research in Economics at the University of Central Arkansas and the author of a new report: Tax Breaks and Subsidies: Challenging the Arkansas Status Quo. Rajshree Agarwal (firstname.lastname@example.org) is director of the Ed Snider Center for Enterprise and Markets at the University of Maryland's Robert H. Smith School of Business, and a Cato adjunct scholar.