The 'Transferable' Subsidy Scam

Meet a big, under-the-radar problem.

Photo credit: Martin Abegglen

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One of the many problems with trying to rein in and break down the state and local corporate subsidy machine is that there are often scams embedded in scams. Digging into the details of a particular program turns up small turns of phrase that make the program even more offensively tilted toward corporate interests than it is on the surface.

I was thinking about this issue recently after reading an article on some proposed changes to a Georgia program that provides subsidies to musical artists and productions that “originate” tours in the state, which basically means rehearsing and starting the tour there. (I wrote about that program in my book as a pretty silly example of the endless desire amongst policymakers to subsidize the entertainment industry, which will ultimately be ineffective.)

Buried near the bottom of the article is a quote from someone representing Georgia Music Partners, a kind of Chamber of Commerce for the state’s music industry. He had this to say regarding potential changes to Georgia’s music subsidy program:

"It’s not working because the thresholds are too high," Hudson told lawmakers. "...The cost of recording has come down dramatically and so the thresholds under the current law are just way too high, and the fact that the credits are not transferable, which they are in post-production film and video games, that’s the other reason it’s not working."

I imagine most people reading the piece, assuming they even got that far into it, glossed right past Mr. Hudson’s final sentence, which sounds like a technocratic tweak that doesn’t matter much. But it’s not that at all. In fact, it’s a huge deal: Business lobbyists are trying to build a scam within a scam by making Georgia’s music subsidy “transferable,” an innocuous-sounding word for a significant problem.

Making a subsidy “transferable” means enabling beneficiaries of that subsidy to sell it on to unrelated third parties. So if a music production company receives tax credits under Georgia’s program, but doesn’t actually have enough tax liability to use all the credits, it can sell them to some other corporation, allowing the purchaser to lower its own tax liability.

Crucially, the corporation purchasing the subsidy doesn’t have to be connected to the intended beneficiary of the program. It doesn’t even have to be in the same industry or otherwise qualify for the subsidy in any way. So, if that change came into effect, music companies in Georgia could sell their subsidies on to non-music companies, even though the whole point of the program under which they received those subsidies is to boost the music industry.

Here are some concrete examples to make this less abstract. Illinois’ film/TV tax credit program is transferable, so film and TV production companies that receive funds from it but don’t really pay that much in taxes simply sell their credits on to a whole host of non-film related corporations, including Heinz, Apple, and Walmart. Public money meant to subsidize film production in Illinois instead subsidizes dominant retailers, tech corporations, and food corporations because of that one little word, “transferable.”

In New Jersey, insurance corporations buy up film tax credits and other corporate subsidies, including those provided under a program meant to reduce food deserts, and use them to lower their insurance tax liabilities, which is a tax levied on the sale of insurance products in the state. That means economic development programs are subsidizing a cut on corporate insurance taxes, for no good reason at all, other than some lobbyist or lawmaker wanted it that way.

Those are just two examples, but these transferable credits are all over the place, all across the country. According to an estimate that was made more than a decade ago and so is surely higher now, transferable credits cost states billions of dollars collectively every year. There’s an entire industry built up around the buying and selling of these subsidies, but the markets are totally opaque, so no one who’s not involved really knows how they function. Worse, many states don’t track sales or purchases, so we don’t even know who the ultimate beneficiaries of this market even are.

In addition to the problems detailed above — and the inherent unfairness of it all — this also wreaks havoc with state bookkeeping, since purchasers sometimes don’t cash in their credits until years later, meaning states were counting on revenue that they actually have to give away to some random corporation that purchased a credit years before.

It’s a mess, is what I’m saying. But making a corporate subsidy transferable is an easy thing to do under the radar, without folks knowing what it means or realizing what their state is in for when such a policy is actually implemented. Just look at the news article above: A radical proposal gets dropped into the 15th paragraph of a story few will read, and is left there unexplained.

Like so many things in the corporate subsidy space though, what’s been done can be undone. Subsidies that are transferable can be changed to non-transferable — or eliminated entirely, of course, but I’ll take what I can get.

My ultimate point is this: Watch out for lawmakers and corporate interests selling transferability as a technocratic tweak to make programs perform better. They just want to turn already problematic corporate handouts into more of a free-for-all.

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— Pat Garofalo