Are Tax Breaks For Game Developers Economically Sound?

May 13, 2014 - E. Zachary Knight

Throughout the US and around the world, game developers are fighting for tax incentives and breaks similar to those offered to other creative industries such as the movie industry. Many groups such as TIGA in the UK make the claim that such tax breaks are needed in order to compete with other nations for game development talent, competition created in part by the tax breaks and incentives offered in those competing nations.

While these fights for increased tax breaks rage on, one question seems to remain unasked. Are these tax incentives worth the trouble?

In its Video Game Nation coverage, Reason asks that very question.

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? [Calvin H. Johnson, professor of law at the University of Texas at Austin], 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." 

While Johnson's example of one potential recipient of these tax incentives seems a bit... ignorant, his main point does make some sense. Is the public getting a valid and worthwhile return on their investments in these programs? This is a very interesting question to ask, especially at a time when the Federal government and many state governments are operating under deficits in their budgets. 

Source: Reason.com

Game Politics Contributor: E. Zachary Knight


Comments

Re: Are Tax Breaks For Game Developers Economically Sound?

Hollywood gets tax breaks.  Art projects get tax breaks.  For-profit museums get tax breaks.

As long as these three things are true, there is no valid reason for gaming to NOT get tax breaks.

--- With the first link, the chain is forged.

Re: Are Tax Breaks For Game Developers Economically Sound?

I spoke on this at SMU back in 2012 (just prior to the 38 Studios debacle so this is out of date now)

 

https://www.youtube.com/watch?v=PEwVDNeFswY

 

While I agree that game studios deserve tax incentives just as much as movies and television - the problem I do have is that a lot of it can be obtained through loopholes and badly worded requirements for obtaining the tax breaks or grants - as a result savvy studios like EA or Activision can obtain the grants whereas smaller studios (or indies) don't have the knowhow to make use of them.  On top of this, a lot of these incentives are designed to build business and hence create jobs in their respective state which can either go sideways (38 studios) or the requisite number of jobs may not be created as smaller studios are becoming more of a norm than they were before.

Is it fair other entertainment avenues receive breaks?  Not really but the size and scope of their work better lends to this type of incentive if only because productions tend to only involve a brief stay in the area and create a boost to the economy and then leave - there's less risk involved than moving an entire business there for the tax breaks.

Re: Are Tax Breaks For Game Developers Economically Sound?

And that certainly calls into question the economical viability of those tax incentives as well. The linked Reason article even points to the potential wastefulness of movie industry tax breaks.

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. 

Re: Are Tax Breaks For Game Developers Economically Sound?

Unfortunately this is a topic rooted far more in philosophy then economics.  Over the years they have been many examinations of the topic and they produce a wide range of 'results' based off exactly what the researcher wants to include and exclude.
 

One reason it is so difficult to really pin down is that such programs are not just about raw numbers, but are also intended to have a halo effect for the region and impact intangible things like the city's reputation/desirability/etc.  Here is where we get into the philosophical problem of, do these one offs have value?  Conservative pundits tend to downplay or completely dismiss them, progressive ones tend to emphasize or outright prioritize them.  Since people can not even agree on what benefits matter, figuring out if a particular program delivers or not tends to be a rather fruitless exercise.

 
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