Rhode Island appears to be taking the hit for Curt Schilling's doomed video game venture, budgeting $112.6 million to pay off a failed loan that lured Schilling's company, 38 Studios, to the state. The video game company subsequently went bankrupt without having produced the game the loan was intended to help fund.
In the wake of this disaster of crony capitalism, Rhode Island has passed a bill calling for a study of tax incentives to see if they actually accomplish much. Pew Charitable Trust's Stateline notes:
The study addresses an area of growing concern among states — whether the popular tax breaks that state governments give businesses are worth the investment. States regularly provide companies with tax incentives to boost economic development within their borders.
For example, Maryland is breaking new ground this year with a $3 million offer of tax breaks to be distributed among cybersecurity startups already in the state and those that agree to locate there, to cash in on the cybersecurity boom. The trade group Council for Community and Economic Research, which tracks tax incentives across 50 states, notes that there are more than 1,600 current tax incentives sponsored by states and localities.
Recently, the effectiveness of some of the incentives has been called into question. According to a study in April 2012 by The Pew Charitable Trusts, Stateline's parent organization, states don't always track the results of their incentives. The report found that Rhode Island was among the 25 states "trailing behind" in evaluating its tax incentives, because it had not taken enough steps to determine whether its agreements were effective.
This bill won't actually explore the circumstances behind the loans provided to Schilling's group, though arguably coverage of the studio's collapse showed everybody enough red flags to arm a color guard.
In any event, the sooner cities start realizing these incentives often don't pay off for their communities the better (Okay, the people behind them probably already know this but you don't win elections with the platform of "No, we didn't give X tax incentives to bring jobs to our town because taxpayers will end up holding the bag if it fails). For example, Peter Suderman pointed out in March the state of Michigan subsidized the filming of Disney's terrible Wizard of Oz prequel to the tune of $40 billion million, $18 billion million of which came through municipal bonds backed by state worker pensions. Then the production studio skipped its payments, leaving the state to have to make it up. We could fill several pages with similar stories of municipal governments using tax breaks to try to pick winners and losers and manipulate economic development, only to have the chosen "winners" end up losing anyway.
For those who missed out on the entire 38 Studios scandal, Reason TV's Anthony L. Fisher has all the highlights below: