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Edward L. Glaeser

Will Mass. give tax breaks to video game industry?

By Edward L. Glaeser
January 27, 2011

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TWO WEEKS ago, Evergreen Solar revealed that it was closing its Devens factory, despite receiving a reported $58 million in state aid. As if on cue, state Representative Vincent Pedone is proposing to lavish taxpayer money on another favored industry: video gaming. Is this new video-gaming proposal any better than the Evergreen Solar deal, or is it throwing good money after bad?

Evergreen Solar began in 1994 as an intellectual collaboration between alumni of Mobil’s Solar Division and an MIT scientist who pioneered String Ribbon solar cells, the kind of creative connection that Greater Boston does so well. Evergreen matured, and in 2007, Massachusetts decided to dole out a reported $58 million in grants, tax breaks, and other incentives to get it to manufacture in Devens, instead of other states that were also willing to pay to attract high profile, clean energy producers. Now Evergreen is shifting production to China, and Massachusetts is hoping to “claw back’’ at least some of the public funds.

The video-gaming proposal’s details are still being worked out, but it seems that the centerpiece will be a transferable tax credit that essentially pays for a quarter of a video-gaming company’s labor costs. The company gets more credits if the video games are developed in a disadvantaged community or if the games prominently feature the Massachusetts state marketing logo. The credit is also designed to reward employment growth.

How is the video-gaming proposal different from the Evergreen Solar deal? Most obviously, it concerns video games, not manufacturing solar panels. Massachusetts’ great edge lies in producing ideas, not goods. Manufacturing solar panels always faced enormous headwinds here because of our high costs, especially the average annual salaries of more than $100,000 that Massachusetts solar manufacturers pay their employees, according to the Solar Foundation.

Video gaming is more likely to succeed because it plays to the Commonwealth’s creative strengths, but that doesn’t make it more worthy of subsidy. Although clean energy reduces our dangerous dependence on fossil fuels, I suspect there aren’t many parents who want their children’s video gaming supported by state subsidies. All high-tech industries offer the promise of innovations that better our lives, so why should we bribe conventional software producers to move into video gaming?

Another major difference between the video-gaming proposal and Evergreen is that Evergreen was a firm-specific deal, while the video-gaming proposal advantages the entire sector. But that may not be a plus. Focusing on Evergreen meant that tax dollars were targeted toward a company that always seemed about to move. A broader tax credit program throws money at every firm, even those that are always going to stay.

Typically, when economists talk about broad-based reform, we mean lower individual and corporate income taxes for everyone, not just a massive tax credit for a tiny and well-paid slice of industry.

A third difference with Evergreen is that the video game tax credit is paid after, not before, workers get hired, and that reduces the difficult problem of enforcing claw-back provisions. Of course, those workers might have been hired anyway, and public payment of a large chunk of an industry’s labor costs creates other distortions. If the government covers a quarter of a company’s employment costs, that company doesn’t have strong incentives to keep its workforce lean and efficient. Firms also have plenty of incentive to masquerade as video gamers, even if their main business is something else.

One justification for the subsidy is the lemming defense, beloved by misbehaving children for decades: other places are also doing it. But by embracing video-game incentives ourselves, we only encourage a race to the bottom. If every state subsidizes this industry, then we will gain little new employment from our program. The main result will be a wildly subsidized video-game sector.

Targeted subsidies, for Evergreen or video gaming, are neither fair nor likely to engender wide-spread economic growth. The best economic development strategy is to improve fundamentals: fewer regulations, lower tax rates for everyone, good services, and especially good schools.

Evergreen showed the dangers of trying to micro-manage innovation. Generously subsidizing video games is really just more of the same. Massachusetts should not play favorites. It should train and attract smart people and then get out of the way.

Edward L. Glaeser, a professor of economics at Harvard University, is author of the forthcoming book “The Triumph of the City.’’ His column appears regularly in the Globe.

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