Giving credit for grants

by John Hood, John Locke Foundation and NC SPIN panelist, August 6, 2014.

The question of whether government ought to subsidize historic preservation or Hollywood filmmaking is distinguishable from the question of how government ought to go about delivering those subsidies. Unfortunately, these questions got all jumbled up together during legislative debates this year.

For the record, I fail to see any justification for compelling taxpayers to subsidize film and television production in North Carolina. Lots of other industries employ hundreds, thousands, or tens of thousands of North Carolinians. They don’t typically receive gigantic subsidies from the state. If the overall tax burden makes its difficult for production companies to do business here, that it probably makes it difficult for other companies to do business here. We ought to reduce taxes further. But playing favorites just because other states play favorites is not in the interest of taxpayers (the fact that it is in the interest of the affected industry is neither surprising nor relevant).

Also for the record, I fail to see any justification for compelling state taxpayers to subsidize the preservation of historic properties in particular cities or towns. On the other hand, I can envision a justification for local taxpayers to chip in for renovating historic buildings that may, if left abandoned, endanger the structural integrity of neighboring properties or threaten public health and safety.

Let’s say I’m wrong about both of these issues, however. (It’s been known to happen, roughly with the same frequency as lunar eclipses and federal budget surpluses.) That still doesn’t mean that North Carolina ought to deliver these subsidies in the form of state tax credits — a practice that the General Assembly wisely allowed to sunset this year.

The purpose of the tax code should be to raise revenue for government services — period. Its function shouldn’t be to redistribute income, favor certain personal behaviors or others, or force taxpayers to become venture capitalists or industry financiers.

To the extent that lawmakers stick targeted tax incentives into the personal or corporate income tax, that raises the marginal tax rates necessary to raise roughly the same amount of revenue. That’s true even if you assume some feedback loop of revenues from business attracting to the state by the incentives. Higher tax rates discourage work, savings, investment, and entrepreneurship across the economy.

Moreover, tax credits are less transparent than on-budget grant programs. The public is better served when spending is clearly spelled out in annual budget documents, where it can be evaluated against alternative uses of the dollar.

If North Carolina is going to subsidize film and television production, it should do so the way the 2014-15 budget does: by setting aside a certain amount of money and allowing companies to submit grant applications. If industry leaders think there is a case for spending more than the $10 million authorized this year, they should make it. Perhaps the 2015 General Assembly will double, triple, or quadruple the amount. That would still be better for taxpayers than hiding the subsidy in the tax code.

Similarly, I like the idea of encouraging local governments to set up historic-preservation grant programs at their discretion. If state lawmakers really want to, they could insert some one-time matching funds in the 2015 budget to help localities get started. Because virtually all of the potential benefits of a renovation project accrue to those who live, work, or sell goods and services in that community, it make sense for any subsidies to derive from local property and sales taxes. Again, I’m not persuaded that government at any level should intervene in the historic-property business on economic grounds. But keeping certain properties from becoming blighted might well be a defensible function of local government.

It’s best to keep the tax code clean, even at the expense of cluttering up the budget with grant programs. Paying taxes should be as easy as possible. Obtaining government grants, on the other hand, should be challenging enough to separate the wheat from the chaff — and fully disclosed from application to final report.

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