Cut This, Go Home: Eliminate Targeted Tax Credits, Film Subsidy

This series, entitled “Cut This, Go Home,” includes several budget items that should no longer receive taxpayer funding because they fall well outside the legitimate, core functions of government.

Other items that should be eliminated via the budget are targeted tax credits. Such tax credits single out specific industries or businesses to enable them to avoid paying certain taxes or pay a far lower rate than the legally established rate that other enterprises must pay.

The exempted entities thus enjoy a politically-created competitive advantage, creating substantial distortions in the allocation of productive resources. Instead of responding to consumer preferences, producers lobby for political privilege. This fosters an environment of political patronage and corruption.

Such intervention into the economy falls outside the scope of the proper role of government.

North Carolina’s tax code is stuffed with targeted tax exemptions and corporate handouts, but the four listed here in particular stand out as ones that should be allowed to sunset as originally scheduled or should not be allowed to come back.

• Film production tax credits: The House budget included $40 million for a “Film and Entertainment Grant Fund” to replace the expired film tax credit, a change that is an even more egregious act because it involves direct payments of taxpayer dollars. This handout program forces taxpayers to subsidize Hollywood film production companies.
• Historic preservation tax credits: This credit offers a tax break to improvements to buildings deemed “historic” by a political body – an advantage not enjoyed by owners of other buildings. A fiscal note estimates the House budget’s proposal to bring back the credit would cost NC taxpayers $8 million per year.
• Renewable energy tax credit: The generous 35 percent state tax credit is in addition to the 30 percent federal tax credit. NC’s solar industry is a complete crony capitalist creation, dependent on government tax credits and mandates for its very existence. This credit is scheduled to expire at the end of 2017 and should be allowed to do so. Fiscal research estimates a continuation of the credit amounts to $47 million in FY 2016-17 alone, growing to $94 million the following year. The credits will rise even more rapidly in future years.
• Motorsports Parts and Fuel Sales Tax Refund: A tax exemption for service contracts and a sales tax refund for professional motorsports vehicle parts and aviation fuel for motorsports event travel is set to expire. It should be allowed to do so. Fiscal research estimates that extending these exemptions would total $1.9 million next fiscal year, and more than double to $4 million the following year.

Targeted tax credits create unfair political advantages for recipients. Companies should compete in the marketplace on a level playing field. Forcing some to pay higher tax rates while exempting others from taxes is an unfair practice that enables some businesses to succeed and forces others to fail.

Moreover, expanding the tax base enables tax rates to remain low, and makes it easier to cut taxes further in the future. The film grant program diverts tens of millions of dollars that could be used for other, more legitimate functions, like public safety or classroom teachers.