The New York Times today has published a damning blow-by-blow account of how Michigan politicians and the Obama administration combined to squander tens of millions of dollars chasing the phony dream of subsidizing the Great Lakes State's way to audiovisual industry success. Excerpt:
It all started back in August 2007, when Gov. Jennifer M. Granholm met with Mike Binder, a Michigan-born actor and director who was lamenting the state’s lackluster program to award financial aid — otherwise known as film credits — to the movie industry. Ms. Granholm, an aspiring actress when she was in her early 20s, became determined to make Michigan competitive, she recalled.
Eight months later, the capital of the flailing auto industry became the capital of film tax credits. For every dollar spent locally, filmmakers would receive almost half back from Michigan.
What could go wrong?
The corporatism hardly stopped there. Linden Nelson, a "well-connected local entrepreneur with a charismatic personality," dreamed up an idea to create a new film studio in Pontiac on the site of a shuttered GM facility. He happened to call his old buddy Ari Emanuel, the well-connected Hollywood agent with a charismatic personality who happened to be the brother of the then-White House chief of staff. "Not to use an L.A. phrase," Emanuel told the Detroit Regional Chamber of Commerce, "I think this is a no-brainer for the state of Michigan."
The Nelson/Emanuel team so believed in this no-brainer that they agreed to put up "a total of $10 million to $12 million of their own money," bless their hearts. If only the project cost that much! "They would pay for the rest — $70 million or so — using borrowed money and state and federal incentives."
The proposed studio received "redevelopment tax credits from the federal government and separate aid from the state that included incentives for technology companies that hire residents." Naturally, Nelson/Emanuel wanted handouts from the city of Pontiac, but the city of Pontiac had been declared a financial basket case by Gov. Granholm in February 2009, in part because it was "still weighted down by old incentives it had given to businesses like G.M." Still, the city caved.
It gets worse:
Not long after, he and the other studio investors hit a major hurdle. They would be borrowing around $18 million in municipal bonds, but they needed someone to back them.
Over the objections of some local officials, the state agreed to use the state workers' pension funds to guarantee the bonds. If the investors failed to pay, the retirees would be on the hook.
At the time of the deal, the governor was speaking regularly with Mr. Obama, who was negotiating the General Motors bailout. Edward B. Montgomery, who was leading the White House's efforts on communities and workers affected by the automaker’s bankruptcy, was engaged on the studio plans.
Republican Gov. Rick Snyder, elected in 2010, gutted the subsidy program, and a new emergency manager of Pontiac turned out to be a huge critic of industrial tax incentives as well. "Almost immediately," the Times reports, "filmmakers pulled out of Michigan":
When the bill for the studio's bond interest came due in February this year, it paid only a portion, $210,000. The state pension fund had to pick up the remaining $420,000. Mr. Nelson said he and his partners would have made the payment if the state had not changed the tax credit program. "No one would have missed a bond payment," he said. "No one would have missed anything." [...]
In August, the studio defaulted on the entire $630,000 payment on the bond[.]
But fear not! The investors "are lobbying state lawmakers to put more money into the tax credits and have formed a political action committee," and have enlisted the Teamsters union to help.
This story should be blown up into 500-point type and stabbed onto the closed doors of any lawmaker who ever again talks about public "investments" to goose politically favored and/or sexy business sectors. If an established industry–Hollywood's a century old, people–cannot survive without $1.5 billion in government giveaways, then it does not deserve to survive. Business plans based on political whims are inherently unstable, and usually a net drag on the private economy.
Worst of all, these terrible outcomes are 100 percent predictable. Need another reason to donate to Reason? How about the impressive paper trail we've compiled on the subject of film subsidies and tax credits alone. As Senior Editor Peter Suderman wrote as recently as in our December 2012 issue,
[S]tate-based film tax credits are a big idea without a big payoff. Currently 43 states offer the subsidies, which are worth a total of $1.5 billion. Multiple government reviews of those credits in states such as Michigan and Massachusetts have concluded that the subsidies typically fail to pay for themselves. Instead, states end up losing money paying for film productions that in many cases would have happened with or without the tax incentives.
An America that reads more of this type of analysis is an America less likely to repeat such an obvious mistake. Or to write lines like this chin-scratcher in the otherwise terrific Times piece:
Hollywood may make movies about the evils of capitalism, but it rarely works without incentives, which are paid for by taxpayers.