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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