In a recent blog post, Matt Yglesias casts a skeptical eye on incentives for film production in a particular state or local economy.  Many states offer huge incentives for films to be made in the state, on the grounds that this will attract additional economic activity to the state.

Matt Yglesias’s arguments against film incentives focus on what economists call the “opportunity cost” of this tax incentive. That is, these tax incentives require other taxes to be raised or services to be cut, which will depress business activity. As he says, wouldn’t you expect “the higher tax rates [to] just offset the positive impact of the targeted tax break?”

(Some of the commenters at Yglesias’s blog argue that perhaps the tax breaks sufficiently boost local economic activity that they raise tax revenue. However, the research evidence strongly suggests that targeted tax breaks do not pay for themselves.)

Yglesias’s argument is incomplete. The tax break for film production is for new investments in companies that sell their goods and services outside the state. The increased tax rates on other businesses may be on existing businesses that are not thinking of investing, or on local retailers that are tied to the local economy. Under those circumstances, it is certainly theoretically possible for targeted tax breaks to generate new local business activity, even if financed through increases in other business taxes.

There are three stronger arguments against targeted tax breaks for film production. The first is that such subsidies probably largely create relatively low-wage, temporary jobs. This significantly reduces any possible gain in per capita earning from a state’s success in enticing the film industry.  As argued in chapter 5 of Investing in Kids, bringing in lower wage jobs may actually lower a state’s wage standards and help depress state earnings per capita.

The second argument is that because of the political prestige associated with the film industry, these film subsidies have through interstate competition ended up at grossly excessive levels.  For example, Michigan provides a film credit that ranges from 30 to 42% of a film’s various in-Michigan production costs. Such costly credits are less likely to have benefits exceeding costs than more modest credits.

The third argument is that whatever the benefits from a state or local perspective, from a national perspective these credits are largely just redistributing economic activity. The net national benefit is likely to be quite small. (Perhaps some film activity gets redistributed to the U.S., but this will be much smaller than the gain to a particular state.)

In contrast, promoting economic development through alternatives such as early childhood programs offers greater benefits compared to costs. These programs improve job standards and wage rates for former child participants, rather than depressing wage standards. And, as I discuss in chapter 10 of my book Investing in Kids, the benefits of early childhood programs from a national perspective are even greater than those from a state perspective.  Increasing the quality of labor supply through early childhood investment causes more and better jobs to be created in the nation as well as in the state or local area making these early childhood investments.