Iowa Subsidizes the Movie Industry -- A Good Idea?

September 30, 2009, 8:20 a.m.

Movies Are Getting More Expensive
And It's Not Just the Ticket and Popcorn Prices
(brought to you by FromDC2Iowa.blogspot.com*)
Now I don't mean to minimize the outrageous prices we're charged for popcorn at the movies. And if you're curious as to how much profit a movie theater can make from 11 cents worth of popcorn see my earlier analysis in Nicholas Johnson, "From Politics to Popcorn," January 1, 2007.

But it turns out we're spending millions of dollars of our own money making those movies. And since it now turns out some of those millions are going to private cars for the movie makers and iPhones for their kids, questions are being asked about the wisdom and generosity of Iowans paying 50% of the cost of movies made in this state -- by far the most generous program of any U.S. state, even if it all went into movie costs.

See, Donnelle Eller, "State weighs film credits' cost vs. return," Des Moines Register, September 27, 2009; Jason Clayworth, "State routinely withholds tax credit data from public," Des Moines Register, September 28, 2009; Jason Clayworth, "Director denies abusing tax-credit system," Des Moines Register, September 29, 2009.

Frankly, I think that focus is too narrow.

Transferring taxpayers' money to the bottom line of for-profit corporations, and the pet projects of wealthy campaign contributors, has never made a lot of sense to me.

My writing on the subject was originally prompted by the ill-fated proposal, widely supported by Iowa's politicians and newspapers alike, that was originally the $300 million "Iowa Child" indoor rain forest and ultimately went through many name and purpose changes, a failure to raise a dime of construction money, a rejection by virtually every Iowa town along I-80, and ended as a proposed $150 million "Earthpark" for a tulip bed somewhere in Pella that has yet to be funded and built. See the lengthy, entire Web site, Nicholas Johnson, "Earthpark."

Along the way I came to question everything from "TIFs" to mislabeled "jobs programs" to the bailouts of banks and auto manufacturers, that seemed to me an ill-considered waste of taxpayers' money and a total distortion of the separation between "socialist" programs and "marketplace, free private enterprise."

Here's a sample excerpt from one of the early entries in this blog three years ago, representative of the dozens of op ed columns and blog entries since:

What they [governments] spend tends to fall into three categories (with subsets):

(1) clear government functions (e.g., the military and and public schools, libraries and parks) primarily performed by government employees;
(2) outsourcing related governmental functions to private contractors, performed by employees of for-profit firms (e.g., defense contractors and road building firms); and
(3) simple transfers of public tax revenues to for-profit firms (and individuals).

The latter is problematical for a number of reasons.

(a) Ideologically, how does it square with "capitalism," "free private enterprise," etc.?
(b) With one-third of the 800,000 new start-up firms each year out of business four years later, these aren't very good odds for our tax dollars -- especially given that the recipients we choose to enrich are those who couldn't convince investors, venture capitalists or bankers to pick up the tab.
(c) The data is somewhere between fuzzy and totally non-persuasive that the public receives anything like fair value for its money.
(d) How can we possibly know that a grant of public funds (or tax forgiveness) is actually tipping the scales and making a difference in any given business decision? How do we know the recipient wouldn't have gone ahead anyway with the investment, or that the decisive factors in the decision involved matters other than how much public money they could worm out of the state (e.g., quality of the work force, schools, outdoor recreation, crime control, water supply, transportation networks)?
(e) How do we justify providing cash to one business person while denying it to his or her competitors?
(f) And isn't a system like this just asking for something between good-old-boy-ism and outright bribery in terms of how the goodies are distributed?

Nicholas Johnson, "Neutral Principles, Anyone? Justifying Corporate Welfare," July 12, 2006.

For a Des Moines Register op ed column from three months earlier that expanded on this theme, complete with supporting sources in footnotes in this online version, see Nicholas Johnson, Values Fund May Not Be So Valuable for Taxpayers," Des Moines Register, April 13, 2006.

The practice of transferring the taxpayers' money to the bottom line of for-profit corporations becomes especially insidious when it involves "tax credits." "Transparency" or not, it becomes somewhere between very, very difficult and impossible for the public or media to track just who is getting how much from where and for what when the funds transfer takes the form of reduced taxes.

It would be no more consistent with the desirable separation of socialism from capitalism, but at least everyone would know what's going on, if the published tax rates applied to every individual and business, and the subsidies took the form of appropriations, cash transfers, above the table, to identified beneficiaries in itemized amounts.

The Iowa City Press-Citizen has long been a champion of open government, public meetings, public records, and transparency, and I admire them for that. Indeed, it is the absence of transparency in some of Iowa's tax credit programs that is the focus of the paper's editorial on the abuses in Iowa's efforts to encourage the making of movies here. Editorial, "Public Has a Right to Know About Tax Credits," Iowa City Press-Citizen, September 29, 2009.

I just think the problem of taxpayer grants to for-profit ventures is much bigger, and more destructive of the state's economy, than some tax credits to a movie company. They are just a tiny sub-set of what needs fixing.

State Support of the Arts

In a recent five-part series on the relocation of the University of Iowa's Hancher Auditorium I addressed "Hancher and the University's Academic Mission," a sub-heading in Nicholas Johnson, "Hancher - Part IV," September 17, 2009. Is it consistent with the mission of an academic institution to provide what amounts to public entertainment events -- such as collegiate football, and Broadway shows on tour?

Similar questions need be asked about the use of taxpayers' money to support the arts generally, especially for-profit artistic ventures. But similar answers are also available.

1. "Everybody's doing it." Normally I don't find this a very persuasive argument for transferring my money, against my will, to for profit corporations. But the fact is that most states do exactly what Iowa does for the movie industry. Our 50% may be a little on the generous side compared with their 25% to 30%, but that's kind of a detail. And then there's always the line, "If we don't attract them to Iowa some other state will just attract them elsewhere."

2. "Why not the movie business." Another argument might be that, as long as we're giving away taxpayers' money to for-profit enterprises, why have a bias against the movie business. Clearly my arguments have not been persuasive to those legislators who want to continue favoring some businesses over others in the distribution of my money. That being the case, they might as well include movie makers.

3. "State public relations." Movies made in Iowa, like any other product or service in Iowa, involves local purchases, and employment, benefiting Iowa's economy. But that's the least of their potential benefit to the state. Whether made in Iowa, or merely about Iowa, a film a positive presentation of our state in film or television, or merely a reminder to the public that we exist, can have a positive impact in attracting businesses, professionals, students, and tourists. We can't buy that kind of publicity with print or Internet ads, state magazines and maps, even if we had the money to try. Amazon has a Web page called, "Iowa Connections -- Movies Made in and/or Featuring Iowa" that lists some 20 feature films. And its list doesn't even include "State Fair," "The Music Man," "Cold Turkey" -- a Norman Lear film that paid Iowans in 1969, rather than asking for handouts, as John Carlson reminds us [Photo/poster credit: Des Moines Register] -- or make any mention of the role of Riverside, Iowa, in "Star Trek" or the mention "West Wing" made of Iowa City's Hamburg Inn # 2 (or, alas, Senator Grassley's offer of $50 million of our money for his friends' indoor rain forest).

4. "Legitimate state expenditure." Even if movies were not one of the best public relations bargains going, government support of the arts is more in the tradition of legitimate state expenditures, including those for public schools, parks, libraries and museums. Historically it was kings, and the very wealthiest, who thought it important to support the arts with what was then the equivalent of tax money. Many school boards think it is quite appropriate to provide budgets for student instruction, and extra curricular activities, in the graphic or visual arts, theater, choral groups, dance, bands and orchestras. The state of Iowa is about to invest something on the order of $300 million in the replacement of the Hancher-Voxman-Clapp buildings. Many cities use public money to build local auditoriums and venues. Congress, which seemingly can agree on little else, has over the years agreed to the wisdom of federal support of the arts through such agencies as the National Endowment for the Arts, National Endowment for the Humanities (now headed by our own Jim Leach), and Corporation for Public Broadcasting, among others.

5. "The Creative Community and Economic Growth." Richard Florida and others make a persuasive case that emphasizing creative communities, with the amenities creative professionals are looking for, can do more for economic growth than handing out taxpayers' money to conventional businesses -- businesses that might have come there anyway, or that came only because of the subsidy and will leave as soon as some other community offers them more.

Have you ever stayed to watch all the credits roll after the movie? It's a listing of an incredible number of professions and skills, most of which we've never before heard of and remain something of a mystery as to what they might involve, and often hundreds of people. When a movie is made in Iowa, a number of those jobs come here -- not just the jobs for a few lucky actors and dozens of paid or unpaid "extras." But again, the greatest significance for our state is not that movie making is some great employment program. It is that it enables us to nurture more of the creative class here in Iowa on a permanent basis, and attract those from the creative class in Los Angeles, New York, and elsewhere that come here for the duration of the project.

That's not to say the state's program for subsidizing the movie industry shouldn't be subjected to the same analysis as any other subsidy program. [Jennifer Jacobs, "Gronstal: I may regret creating film incentives program," Des Moines Register, October 2, 2009 (“'If it’s all just a great big give-away with no long-term job creation or economic growth in this state or people having full-time employment, then this isn’t a very good deal for the state of Iowa,'” said Senate Majority Leader Mike Gronstal, D-Council Bluffs").] But it is to say that it may well be able to make a case for taxpayer assistance that other businesses cannot.
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* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source, even if I have to embed it myself. -- Nicholas Johnson
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From Politics to Popcorn

January 1, 2007, 10:15 p.m.

Taking a Popcorn Break from Politics
I just saw four political commercials in a row. Many of the candidates are going to be in Iowa City tomorrow. By Thursday night it will all be over -- even if the inconclusive results (three leading candidates in a virtual tie) makes them wonder if the last year's effort and costs were worth it. We'll pretend we're glad they're gone by Friday, but I suspect we're going to have some withdrawal symptoms as well when they stop sending us mail and leaving phone messages. Like the rest of America we'll be ignored, left to just follow the race on television.

Anyhow, I thought we might take a break from politics and enjoy a little popcorn -- or perhaps merely the economics and politics of popcorn.

As a child, my first awareness of business practices and consumers' need for skepticism was an outgrowth of my observation that the doubling of the price of candy bars (from 5 cents to 10) was accompanied by not only a failure to double the amount of candy but an actual reduction in the size of the candy bar.

I was reminded of this the other evening at one of the Marcus Theaters where I witnessed the same profit-driven phenomenon: more money, less popcorn.

The price of a "regular" container of popcorn, smaller than it used to be, had somehow increased to $4.75.

I like popcorn. It's part of going to the movies. I also make it at home. I didn't know, offhand, what I was paying at the store for the amount of popcorn it would take to fill that container, but decided to find out.

Rather than toss the container in the trash, I took it home with me. It turned out that the amount of popcorn it would take to fill it, once popped, was something less than one-half cup.

Next time I bought popcorn I checked the price. Two pounds of popcorn from a local supermarket (HyVee) is $1.18 -- 59 cents a pound. It turned out the old adage "a pint's a pound the world around" is pretty close for popcorn. Which means that, if Marcus bought its popcorn two pounds at a time at retail rates, once popped the amount of popcorn in that container would cost them about 15 cents. ($1.18/two pounds = 59 cents a pound = pint = 4 half-cups = 59 cents/4 = 15 cents.) That's a $4.60 profit on a $4.75 sale and ingredients worth 15 cents -- a total sale of $19.00 for 59 cents worth of popcorn.

(In the Reuters story, below, you'll see that 30% of the 4 billion gallons of popcorn we consume each year we buy in theaters. That's 1.2 billion gallons, or 19.2 billion one-half cups. At a profit of $4.60 on each half-cup, that's $88.32 billion for the theaters from popcorn sales.)

But of course Marcus Theaters doesn't buy its popcorn at HyVee. (I recall many years ago looking at a movie theater trade association publication and noting that it contained more discussion of popcorn futures than future movies.) It buys popcorn in bags containing 50 pounds of popcorn -- and $950.00 in profits.

Here are a couple of randomly selected examples from the Internet.

Instawares' Web site indicates that "today's price" for "Weaver Gold" is $22.55 per 50-pound bag (45.1 cents per pound). Sunglo advertises a 50-pound bag for $25.95 (51.9 cents a pound).

At 45 cents a pound that's a little over 11-cents worth of popcorn in that $4.75 container. And I would suspect that if a movie theater chain were to buy those 50-pound bags in carload lots they'd be even cheaper.

In fairness, there's more cost to that $4.75 container than the popcorn it contains: the container probably costs more than the popcorn, there's the labor cost for those highly-paid teenagers, and a variety of overhead costs. Moreover, there's a level of competition from television (including the explosion from a three-network economy to 300 channels on cable), videotape and DVD sales and rental (including Netflix by mail, and Internet delivery), video games and distribution of video material to hand held devices and cell phones that simply didn't exist 50 years ago. And my impression is that a disproportionate share of the ticket sales ends up with the studios rather than the theaters.

Nonetheless, it still seems to me a little excessive to be charging $4.75 for that little container holding a half-cup of popcorn worth 10-to-15 cents -- made possible by filling all those little kernels with air.

And the prices look like they're going up -- at least in part as a result of Iowa's turning its corn into ethanol. Here's a story explaining why, along with a description of this food chain (and profits) from popcorn farmers, to middlemen, to distributors, to theaters, to you.

WASHINGTON (Reuters) - A trip to the local Cineplex may become even pricier soon thanks to surging popcorn costs.

U.S. popcorn prices have risen more than 40 percent since 2006 as soaring demand for feed corn to fuel the ethanol boom has spilled over into the favorite snack of American movie-goers.

Companies that purchase popcorn each year, as opposed to larger crops such as corn and soybeans, are confined to choosing among a relatively small number of suppliers. This makes it important for popcorn companies to offer competitive prices and forge good relationships with farmers.

"I think (ethanol is) going to have a uniform effect on all geographical areas that produce popcorn," said Dennis Kunnemann, president of AK Acres Popcorn, which buys, processes and then sells popcorn to distributors, packagers and snack-food retailers.

"This year, we've paid the highest price ever that I've contracted for, 13 cents a pound," compared with 9 cents per lb last year, Kunnemann added.

The family-owned company in Imperial, Nebraska, has passed its increased cost on to customers by signing new contracts for between 18 and 20 cents a lb, up about 40 percent from 2006.

AK Acres also has helped in the ethanol boom by selling land next to its facility for the construction of an ethanol plant slated to begin later this year.

Americans consume 4 billion gallons of popcorn annually, totaling 13.5 gallons per person, according to the Popcorn Board, which promotes the industry. An estimated 70 percent of the snack food is consumed in homes, with the remaining 30 percent eaten at theaters, stadiums and schools.

Since most of the world's popcorn is grown in the United States, it seems fitting that American movie-goers and retail shoppers consume more of the snack than their counterparts in any other country.

Christopher Doering, "Popcorn Prices Popping Thanks to Ethanol Boom," Reuters, July 10, 2007.

So go to the caucus, literally "stand by your man -- or woman," and then come home, pop some popcorn, watch the results on television, and savor your do-it-yourself enormous popcorn savings.

Happy New Year!

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