Congress certainly doesn't do taxes well, or at least it hasn't since 1986. The federal corporate tax needs to be reformed. The personal income tax could stand some good tax policy revisions as well. Members of Congress have very little knowledge about good tax policy, so perhaps it's not surprising that several members have weighed in on the wrong side of a state tax issue.
As my colleague Maria Koklanaris reported, 29 Democratic members of Congress asked leaders of the California State Legislature to reauthorize and expand the state's film tax credit. Led by Rep. Adam B. Schiff, D-Calif., the federal lawmakers asked California to extend a very bad tax policy, saying that if it doesn't, film jobs will be lost forever to other states.
Schiff and his 28 colleagues are badly mistaken when it comes to tax policy. A sound tax system is built on low rates and a broad base. Anybody who has studied taxes for five minutes knows that. Film tax credits narrow the tax base -- and when you narrow the base, rates on everything else are higher than they should be.
The tax system should refrain from picking winners and losers in the marketplace. Why film credits? Why not some other industry? Politicians are the worst at determining what's best for the marketplace. Despite the studies funded by the Motion Picture Association of America that say otherwise, film tax credits don't work. In virtually every state that has them, there's no discernible economic effect -- that is, the tax giveaway did not result in more economic activity than would have occurred without it. In some states, the government paid out more than it got back in revenue. A study by the Michigan Senate concluded that "film incentives represent lost revenue and do not generate sufficient private sector activity to offset their costs completely."
But what is stunning to me is that 29 members of Congress would actively endorse bad tax policy. Instead of criticizing the use of tax incentives, they are urging California to adopt more. That's incredible.