Yesterday we learned the names of the two movie producers who used the Iowa Department of Economic Development’s film tax credits to purchase luxury automobiles. Bruce Isacson, who filmed the movie “South Dakota,” apparently owns a 2008 Range Rover that cost $61,000. Donald Borchers, who remade “Children of the Corn,” owns a $68,000 Mercedes.
While neither car was used in the films, it’s safe to say both Isacson and Borchers will claim that they needed the vehicles while in Iowa working on their projects. While I’m not defending the actions of Isacson or Brochers, the legislation that was signed by Culver didn’t say that they couldn’t purchase such vehicles.
When you take away the make, model, and price of the vehicles involved in the scandal, it’s not really that big of a story. Would we be worked up if Isacson bought a Chevy Malibu for $23,000? I doubt it. The fact that a Land Rover and Mercedes are involved gives the story the drama the media needs to sell newspapers and bring in TV viewers. Maybe Governor Culver and legislators should have made the fleet of unused state vehicles sitting in a parking ramp near the capitol available for use. They should be smoke free, unless, of course, the governor’s wife has ridden in any of them.
The core problem that the purchase of these vehicles has exposed is that the Iowa legislature and Governor Culver created a bad law. Making matters worse, Governor Culver and his administration have proven that they were not prepared to oversee that the program was properly administered. The result is more bad news for Iowa taxpayers as they are on the hook for more than $300 million in tax credits to Hollywood movie producers.
Generally speaking, tax credits are good ways to encourage behavior that is beneficial to the state. On the federal level, tax credits exist to help people who are raising a family keep more of their money, and we also provide tax credits to people who going to college, getting an MBA or other advanced degree. On the state level, we provide research and development tax credits to businesses. Those are great tools to help build a diverse work force and bring long-lasting, quality jobs to Iowa. The Iowa Film tax credits don’t operate in the same way. Permanent jobs are not created, and the office that is responsible for overseeing the program is full of incompetence.
While the Iowans are now focused on the abuses of the system, other states that have doled out similar incentives are starting to wonder what return are they getting on their investment. The LA Times just recently had a story about Wisconsin’s film credits. Iowa’s elected officials should look to what happened to our neighbor to the northeast and ask ourselves if we really want to continue down this road.
The state Department of Commerce, which manages the [Film Incentive] program, concluded that the crew for “Public Enemies” was in Wisconsin for 32 days, the movie, about the life of the bank robber John Dillinger, was filmed in Oshkosh, Columbus and Madison. It received about $4.6 million in taxpayer money, including payments that offset part of the $5,625.16 paid to [Johnny] Depp’s hairstylist, $16,490 for his makeup artist and $38,771.40 for two chauffeurs, according to documents obtained by The Times.
The study said the production contributed about $5 million to the Wisconsin economy and about $270,000 in taxes, figures that are disputed by a film advocacy group that placed the movie’s economic impact at $7.4 million.
“We lost a lot of money,” said Zach Brandon, senior policy director at the Department of Commerce, who declined to discuss the details of the document. “We had to get off the crazy train.”
Wisconsin used to have a 25% film tax credit. Iowa’s film tax credit is 50%, and workers on these projects in Iowa don’t have to pay Iowa income tax. Now, after reviewing the success of its program, Wisconsin only offers a $500,000-a-year grant to bolster in-state film production companies.
There were warning signs that these film incentives were not all that they were cracked up to be long before Iowa passed its film tax credit law. In the fall of 2006, The Fedgazette – a regional business publication issued by the Federal Reserve Bank of Minneapolis – wrote the following:
“When Wisconsin’s incentive bill was proposed, a state Department of Revenue report suggested the net fiscal impact was ultimately ‘indeterminate.’ But it calculated a hypothetical example of a production with $10 million in expenditures, wages of $50,000 for 100 employees and 50 percent of expenditures subject to sales and use taxes (and thus rebates) and concluded that the state would likely see a net loss in revenue.
Given current incentive levels, it’s not hard to see why. With rebates on production costs running 15 percent in Minnesota and 25 percent in Wisconsin and elsewhere (and among sundry other incentives), these subsidies will be difficult to recoup by states when taxes—sales, income, corporate—on relevant business activities are typically in the single digits in terms of percentage.
And the debate also misses the fundamental economic question of opportunity costs: What public good or service went unfunded because lawmakers decided to use finite tax dollars for film incentives, and what would be the return on this alternative investment?”
Thus far, Republicans are hesitant to call for the end of the Iowa film tax credits. Instead, Republican gubernatorial candidate Chris Rants has posed a series of questions to help determine what financial impact the scandal will have on the state’s budget. Christian Fong, who is also vying for the Republican gubernatorial nomination, is calling on Governor Culver to move forward with a state website to provide more transparency. Bob Vander Plaats, on the other hand, sees this as another example of state government picking winners and losers.
Vander Plaats said, “We need to create a fair playing field for all business. As I’ve traveled across this state, I’ve never had a business leader tell me they want a tilted playing field that they could take advantage of. They just want an even playing field so that they can compete.” Vander Plaats also said, “It’s easy for Governor Culver to be outraged now that this scandal has been exposed. He was asleep at the switch and is responsible for the people who he hired to oversee these programs.”
While Vander Plaats came the closest to calling for a repeal of the program, Republicans risk being on the wrong side of this issue if they don’t call for the program’s demise. Governor Culver has already fired three people in his administration and has identifies the two villains who misused the tax credits. His next logical step is to call for the end of the program.
Governor Culver will do so because he simply can’t continue to fund the program. He already has his hands full trying to balance a budget that starts off with a $1 billon spending gap. Republicans should call for the end of the program because Culver has shown that he is incapable of managing it and because it’s the right thing to do. Additionally, at a time when so many Iowans are out of work, it’s not politically wise to be on the side of tax credits for movie producers.
We should follow the lead of our neighbors, admit we made a mistake, and repeal the Iowa Film tax credit program. After we do that, we can find a better way to develop and encourage the film industry in Iowa. We just might want to make sure we have a competent Governor first.
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