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Netflix and Swindle
A film subsidy sob story in New Mexico.
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There’s been a lot of news recently regarding the “streaming wars,” which is the competition between major entertainment streaming services. Disney rolled out a whole new slate of Marvel and Star Wars content that will be featured on its Disney+ platform, while Warner Bros. announced that all of its 2021 films will be released on HBO Max. An analysis this week said Disney+ will have as many subscribers as Netflix by 2022. I can’t even turn on my TV without seeing a commercial asking me to sign up for the Discovery+ service.
But there’s also a public policy war going on when it comes to the movie and TV business: The competition to throw ever-more tax subsidies at Hollywood.
The latest episode in this saga takes place in New Mexico, where Netflix plans to expand ABQ Studios, which it purchased in 2018. The expansion will be subsidized by $24 million in state and local funds, plus an undisclosed amount in property tax and other tax reductions over the next 20 years that will be provided by the city of Albuquerque.
But that’s just the opening credits, if you will. New Mexico also has a very generous film tax credit program, which provides film companies with reimbursements for 25-30 percent of their qualified costs. These are straight up checks to film productions that do their work in the state. That program opens the door to some $300 million for Netflix, under its current spending patterns.
And there’s even more. New Mexico has a cap on spending for its film subsidy program of $110 million annually. But production companies that qualify as an official “New Mexico film partner” by having at least a 10-year lease on a production facility in the state, are exempt from the cap. By virtue of owning ABQ Studios, Netflix qualifies as a partner, and can therefore blow an essentially limitless hole in New Mexico’s budget. Proponents even call this the “Netflix loophole.”
New Mexico’s Legislative Finance Committee released a forecast earlier this month warning that the film tax credit program poses a significant risk to the state because “costs could quickly grow with no way for the state to mitigate costs.” It also found that the program could soon cost more than the sum total of all of New Mexico’s corporate tax revenue. Not good!
I’ve written a lot about why film tax credits are a giant policy failure. The quick version is that since the film industry is so transient, providing tax breaks to film production ends up mostly renting jobs for a short while, until another state comes along that is willing to pay more. And because a lot of these positions are short-term — as it doesn’t take all that long to film a movie or a season of a TV show — it takes a lot of productions, and therefore a lot of subsidizing, to generate the equivalent of full-time work for a substantial number of folks.
New Mexico was one of the first states to get into the film subsidy game, and experienced a boom and bust because of these dynamics: Initially, lots of productions moved to the state, but when other states created their own subsidy programs, New Mexico was left behind, and felt compelled to throw even more dollars into the fray.
There’s simply no way for states to win this competition: Georgia right now is the center of the non-Hollywood movie making universe because it spends an absurd amount on subsidizing films: $4 billion over the last decade. But eventually, the red ink will become too prevalent, some other state will pony up, and like New Mexico and Louisiana before it, Georgia will lose what it currently has.
Back in 2008, an analysis found that New Mexico’s film subsidy program was returning just 14 cents on the dollar to the state. There’s little reason to think that giving the store away to Netflix by piling film tax credits on top of state tax incentives on top of local property tac breaks is going to make that number look any better in the 2020s.
If you liked this edition of the newsletter, my book, The Billionaire Boondoggle, has an entire chapter on the follies and foibles of film tax credits. Order a copy from your local bookstore, or from your favorite online seller here.
UPDATE: I’ve covered New Jersey’s big investigation into its corporate tax giveaway programs quite a bit, and have been generally impressed. But this week, state lawmakers reportedly came to an agreement to reform those programs, and it’s not looking great. The headline number — $11.5 billion in authorized tax incentives over six years — is eye-popping. I’ll have more on this next week after I’ve had time to delve into the details and see what sort of amendments happen in the legislature, but the situation seems pretty grim in the Garden State.
SHAMELESS SELF-PROMOTION: I had a piece in Business Insider this week on how President-elect Joe Biden can keep his promises to so-called “gig workers” and prevent California’s very problematic Prop. 22 labor law from going nationwide.
ONE MORE THING: State lawmakers in Kansas are reportedly mulling over a bill that would prevent big retailers like Target and Lowe’s from employing what’s known as “dark store theory” to lower their property tax bills. I gave the full run-down on why dark store theory is trash here. Kansas should definitely ban it, as should other states.
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— Pat Garofalo