Netflix ‘deal’ hurts state’s finances in uncertain time

New Mexico remains among the most locked down states in the nation when it comes to the coronavirus. In October, the state’s unemployment rate was among the highest in the nation at 8.1 percent.

This difficult economic news, combined with the election of a more “progressive” Legislature in November, mean that tax increases (and even spending cuts) are likely in store for the upcoming 2021 legislative session. With New Mexico relying heavily on oil and gas revenues, the state’s economic pain will last beyond the coming year.

A recent deal announced by Gov. Michelle Lujan Grisham with the well-known streaming service Netflix is being touted as good news for New Mexico’s economy. In announcing the deal, the governor claimed, “My administration has expanded our state’s competitive film incentives, facilitating higher-wage employment for New Mexicans all across the state.” Under the terms of the deal, Netflix will dramatically expand its footprint in the state, spending $1 billion over the next decade.

Unfortunately, despite all the hype and big-sounding numbers, the Netflix deal is just another example of New Mexico’s economically ignorant political leadership “buying” jobs and economic activity with taxpayer

Even though New Mexico has an annual cap on film tax rebate expenditures, the legislation exempted companies that purchase or sign a 10-year lease for a qualified production facility: This means the cap does not apply to Netflix.

money. The reality is that New Mexico’s already-strapped budgets will be drained even more in the years ahead by this new plan to subsidize Hollywood.

Something that too few in the media do is look closely at the particulars of the deal itself. For example: The state offers a 25 percent film “tax credit” that is really a rebate of 25 percent of the costs of production. Netflix is able to boost that rebate by another 5 percent because they are considered a “qualified” production facility. That means taxpayers will reimburse Netflix for 30 percent of its spending in New Mexico. According to a new report from the Legislative Finance Committee, film subsidy payouts could increase annual tax credit payouts by $25 million beginning next fiscal year.

Lest there be any doubt that film subsidies actually cost the state and its taxpayers money, a separate 2019 Legislative Finance Council report noted, “Because film tax credit payouts are booked to Corporate Income Tax, actual CIT receipts are higher than the final amounts distributed to the general fund.” These subsidies take corporate tax dollars right out of the state treasury and hand them to film companies.

“Tax credits” are just the starting point. Additionally, the state is providing $17 million in Local Economic Development Act incentives; the city of Albuquerque is providing another $7 million in LEDA, and it will also provide an industrial revenue bond to abate some or all property taxes over a 20-year term for the first $500 million investment to build out the facility.

In total, Netflix will receive $300 million + $17 million + $7 million + the Industrial Revenue Bonds tax abatement to eliminate its property taxes.

Finally, even though New Mexico has an annual cap on film tax rebate expenditures, the legislation exempted companies that purchase or sign a 10-year lease for a qualified production facility: This means the cap does not apply to Netflix.

In other words, Netflix is definitely going to grow and appear to create more jobs in New Mexico (which will make a lot of headlines), but it will do so at taxpayer expense. That cost is not just in lost revenue, but in actual spending. Those costs, generated through the tax credit, really a rebate, are borne primarily by state taxpayers. This subsidy is both unfair and unsustainable.

The governor now has locked us in to paying Netflix outrageous sums of money over the next decade at a time of great uncertainty for New Mexico families and the state’s economic outlook.

Paul Gessing is president of New Mexico’s Rio Grande Foundation. The Rio Grande Foundation is an independent, nonpartisan, tax-exempt research and educational organization dedicated to promoting prosperity for New Mexico based on principles of limited government, economic freedom and individual responsibility.