Tax Breaks for Game Makers = EPIC FAIL

"Video games are the most heavily subsidized industry in America," says Calvin H. Johnson, professor of law at the University of Texas at Austin. "Tax ordinarily reduces your return by a third and this is an industry which instead of paying tax on a third of their profits doubles their profits. That is weird."

Last year, video game companies earned over $20 billion in revenue last year in the U.S.—and with expansion into mobile and tablet devices those profits are expected to grow. The promise of a consistent multi-billion dollar revenue stream makes gaming an alluring industry for cash-strapped states who are hungry to get a piece of the action. 

Many states have gone so far as to offer generous tax incentives to companies willing to set up shop within their borders. Texas is leading the way in this approach and is aggressively targeting gaming companies with sweetheart tax deals. 

Under the Texas Moving Image Industry Incentive Program, the Lone Star state has set aside $95 million in funds over the next two years toward grants for both filmmakers and developers—making it the largest incentive program in the nation. And so far it seems to be working. Texas is now only second to California when it comes to video game employment. 

But are these subsidies creating enough economic growth to justify their cost? Johnson, who specializes in tax law, thinks that video game makers are enjoying a tax deal that's too good to be true. 

"If you're going to double the rate of return for federal subsidies then you really ought to have a good justification that the public is getting a benefit equal to that incredibly intense incentive," Johnson states. "And I must admit, I'm not convinced that the unemployed son spending 17 hours in the basement of his mother's house working on his Doom 3 is making a grand contribution." 

Tax breaks for video games are historically rooted in credits for research and development that were established in the mid-1950s to encourage investment in innovation. In 1969—three years before the first home video games were commercially released—Congress expanded the tax credit to include software development. Another research and design credit was added in 1981 to keep America's auto industry competitive with Japan. 

Because of the uniqueness of the video game industry, which extends across the realms of entertainment, online retail, and software development, gaming companies can combine these tax breaks in ways other entertainment businesses cannot. 

In addition to these federal breaks, supporters of state incentive programs say these subsidies are necessary to keep America competitive in the global economy. They argue that without them, gaming jobs could be outsourced to nations with friendlier corporate tax rates. (The U.S. corporate tax rate is currently the highest in the world.)

But several studies have called into question the effectiveness of these programs—a 2013 analysis done by the Tax Foundation found that film tax incentives only generate 30 cents in tax revenue for every dollar spent. And though Texas is strengthening their gaming and film incentives, more states —like Kansas, Missouri, and Connecticut—are scaling back or eliminating their programs altogether. 

Johnson welcomes the contraction as he feels that these subsidies benefit the gaming industry at the expense of other businesses. He argues that over-subsidizing video game companies could not only be harming overall economic growth, but innovation in game design that these credits are intended to encourage. 

"There isn't any reason we should double the rate of return for those gamers because you're subsidizing games that people don't really want that much. You're wasting stuff because things are twice as cheap and they ought to be twice as profitable. The market ought to decide these things." 

About 5 minutes.

Produced by Alexis Garcia. Camera by Paul Detrick. 

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  • ||

    My understanding is that they get the same tax break that oil companies and other industrial producers get.

    So this makes me wonder, why couldn't bitcoin investors and bitcoin miners get the same tax breaks?

  • Paul.||

    Tax breaks are there by design. Democrats pushed for the idea of a complex tax code with many breaks and subsidies because the tax code-- according to (I believe) Clinton's secretary of treatsury-- is there to "set policy" not just to generate revenue.

    According to our progressive friends, this is a feature, not a bug. I suppose that oil companies and video games are just putting the english on the wrong policies.

    People in charge, the right ones are not.

  • ||

    Amazing how by having tax breaks and a complex code, you massively incentivize lobbying and corporate influence. Which they're supposedly against.

  • Paul.||

    they are against it, but they're literally too stupid to make the connection.

    Like that semi-retarded pro-net neutrality article in the Seattle Times the other day.

    "Lobbyists and powerful interests have too much influence on the government regulatory process, that's why we need more government regulation!"

  • Free Society||

    they are against it, but they're literally too stupid to make the connection.

    That is the closest approximation to the truth. It's a thing of wonder, to see so few smart people in the world, and even they are 99% idiot ill-informed opinion havers.

  • Sudden||

    OT: More Conventional Conservatives Starting to Wake Up To Police Abusiveness and Fourth Amendment Deterioration

    Steyn isn't exactly a beltway conservative, but he guest hosts for Rush frequently and could be considered among the leading voices in the broad conservative movement. And this column appears to borrow from the Balko school of nut punching. Here's a conservative lamenting the trampling of fourth amendment protections and the increasing belligerence of cop culture.

    I consider this a positive development.

  • Paul.||

    It's been goin' on for a while.

    As I've said before, when the police started to lose the dumpy, middle-class gun-owning white guy constituency, it was over.

  • Sudden||

    They haven't lost that constituency just yet. The hero myth remains. But there are cracks forming in the walls.

  • Paul.||

    Hey, all of my dumpy, middle-class gun-owning white-guy friends have written off the cops entirely.

    So, that makes about four of us! REVOLUTION!!!!

  • paranoid android||

    Pssh, you should know you're not official until the SPLC has branded you a hate group.

  • Free Society||

    That shouldn't be hard. Just advocate some restrictions against electoral fraud. Presto.

  • Cytotoxic||

    I think it's happening here in Canada too albeit at a more muted pace. The G8 debacle and subsequent TO police state was a big eye-opener. I know internet comments are hardly scientific but National Post (Canada's center-right paper of accord) Disqus comments are overwhelmingly down on cops.

  • Cytotoxic||

    You SF'd the link.

  • Sudden||

    fixed

    Good article. I recommend.

  • Cytotoxic||

    I'm shocked that anyone would call the cops of all people for help with the mentally problematic. For one thing, the cops are bad news. For second, even if they weren't, this is not what they're trained for.

    This is good progress. Maybe conservatives can take it a step further and bring the hammer down on Maricopa county? How 'bout it guys?

  • ||

    For second, even if they weren't, this is not what they're trained for.

    It behooves all of us to remember that not even the professionals are trained for this. The ability to predict future violence from the mentally ill is firmly rooted in the ability to observe existing or past violence, planning of violence, or escalating conflict.

    Almost makes one think that there are people and events out there that neither the police nor highly-educated TOP MEN can prepare us for and/or keep us shielded from.

  • x4rqcks3f||

    All tax breaks are good. Subsidies are a different issue.

  • Restoras||

    Last year, video game companies earned over $20 billion in revenue last year in the U.S.—and with expansion into mobile and tablet devices those profits are expected to grow

    Revenues aren't profits.

    With respect to states getting in on the action - video game development can take years. So software developers that reside in a particular location most certainly benefit that community as long as they reside there. Film production - not really the same as it is completely transitory and very short-lived.

    Corporations don't pay taxes - people do. Not that any industry deserves or should have any kind of tax credits, but as long as you have 'corporate' taxes you will have this kind of nonsense. If you want to get rid of it you have to get rid of 'corporate' taxes.

    And I must admit, I'm not convinced that the unemployed son spending 17 hours in the basement of his mother's house working on his Doom 3 is making a grand contribution

    What a completely ignorant and stupid comment, and is even borderline fascist. It's a $20 billion revenue business that employs a crapton of really smart software developers - that he wants to what? Call it names becasue it doesn't add anything to society in his estimation? Society seems to disagree since it spends so much money and time on it. If only the right Top. Men. were in charge.

  • kyoseki||

    If these are anything like film "tax credits" then they're actually subsidies.

    Tax cuts are great, but these tax credits have state taxpayers funding 20-30% of the game/film studios operating expenses - you could reduce corporate taxes to 0 and still not compete with that because their effective tax rate is actually minus 20%.

    .. and if the film/game does phenomenally well, it's typically the distributor/publisher that's raking in the cash, and more often than not, they're outside the subsidized location.

    It's a scam, but politicans love to get tech companies to relocate because setting up a computer based office takes a lot less time than building a car factory.

  • ||

    Not to mention that even car dealerships necessitate factories, necessitate raw materials, energy and rails while programming jobs necessitate... clouds.

    A computer-based office lets you add n people to the employed column while consuming "0" natural resources while contributing "0" to emissions, landfills, etc.

  • kyoseki||

    Exactly.

    You throw money at the developer, they stick a few guys in an office and you get to say you created X number of jobs.

    Never mind that the jobs can be done anywhere and are only there as long as you keep subsidizing them, it still looks good in the job creation column.

    It's practically identical to film subsidies in that regard, except that games take a lot longer to make.

  • straffinrun||

    True. What the individual consumer wants is irrelevant cuz they are stupid. Watching the govt try and form policy through the tax code is like watching a clown trying to juggle ten balls, catching two and saying "voila!".

  • Agammamon||

    And I must admit, I'm not convinced that the unemployed son spending 17 hours in the basement of his mother's house working on his Doom 3 is making a grand contribution

    Well, I have to admit he's got a point here - Doom 3 was one of the biggest wastes of talent to come out of software development in a long time.

    Id makes great rendering engines, but shitty development tools so no-one wants to use their tech. And the games Id does put out are meh at best. Doom was an amazing achievement in gameplay, Doom 3 was all the Doom stuff we got bored with 10 years earlier.

  • Restoras||

    For the last mother fucking time.

    Last year, video game companies earned over $20 billion in revenue last year in the U.S.—and with expansion into mobile and tablet devices those profits are expected to grow.

    Revenues are NOT profits! Profit is what is left over after COGS, operating expense, interest and taxes. In other words, revenue is the TOP LINE and profits are the BOTTOM LINE.

    The promise of a consistent multi-billion dollar revenue stream makes gaming an alluring industry for cash-strapped states who are hungry to get a piece of the action.

    Unless governments are going to start taking off the top line, the revenue stream is meaningless since it is pre-tax income that is elegible for taxation, and not revenue that is eligible for taxation.

  • creech||

    The confusion serves to pull the wool over the voters eyes. He in Penna., one of the Democrat candidates for governor is proposing a 10% severance tax on oil and gas drillers. What he doesn't make clear is that it is on revenues - i.e. a gross receipts tax.
    Several voters I talked to think it is "fair" to tax their profits by 10% because they think 90% of profits will remain in the drillers' pockets. No, you skim 10% off revenues and most employers will end up with very narrow or nil profits.

  • KDN||

    10% of gross? That's absurd. Hell, the Feds only need a 1.15% gross tax to equalize the revenue brought in by the corporate income tax (per 2007 IRS figures).

  • eyeroller||

    In Texas, there actually is a tax on top-line revenue. (Rick Perry pushed that one.)

  • Copernicus||

    Hawaii too. But that's to be expected in a communist country.

  • Sevo||

    Anyone else sick of video games?
    ALL VIDEO GAMES! ALL THE TIME!

  • cavalier973||

    The Reason writers are being trendy.

  • Sevo||

    You oughta see their new GYM SHOES!

  • cavalier973||

    That picture? Of Ms. Pacman and the words "game over"? That's...not right.

  • Copernicus||

    "Last year, video game companies earned over $20 billion in revenue last year"

    Good thing they told us twice in one sentence or we might not know what year we're talking about.

    Proofread much?

  • sarcasmic||

    OT: Heroes in blue choking and kicking eleven year old boys.

    http://www.dailymail.co.uk/new.....round.html

  • Pro Libertate||

    Flat taxes for individuals and corporations (or an equivalent system that prevents gaming), and a constitutional amendment making it illegal for government to bribe businesses.

    Oh, for the love of God, the comments are bugging out again?

  • craiginmass||

    Kurt Shilling stole 38 million dollars from the people of Rhode Island - that's about $100 per family.

    He was connected. It has nothing to do with conservative or liberal - Kurt is very conservative, the guy he paid off is very liberal. It's a money game....RI figured they'd woo him away from MA. with loan guarantees.

    Talk about BS. They should have asked me. What are the chances of success for new video game company? Certainly nowhere near the % where taxpayers money should be involved.

    But this stuff is pervasive. Don't get me started about Stadium and all the places forcing the public to pay for the fancy places where the billionaire team owners can strut their stuff.

  • craiginmass||

    I was wrong about the amount. It's 75 million!

  • kewa622||

    its awesome. Start working at home with Google. It’s a great work at home opportunity. Just work for few hours. I earn up to $500 a week. I can’t believe how easy it was once I tried it out. www.Pow6.com

  • Göran||

    Can someone please explain why this is an epic fail? Tax breaks mean less tax. How is that not a good thing?

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