Should Pennsylvania lure video game developers with tax credits? [feature]

Given the $20 billion spent on gaming [PDF] in 2012, twice that of Hollywood, economic development strategies continue to include video game production as an anchor that could lead to change — Grand Theft Auto V was a boon for Austin. Yet five years after the grassroots, now-defunct Videogame Growth Initiative was launched by local stakeholders to make Pennsylvania better at attracting big game production studios, not much has changed. Now the issue is being taken up again, with new proposed state legislation. Is now the time?

Like the film credit boom from a generation ago, many states– 21 of them, to be exact – have begun offering tax credits to game developers in the last decade, as gaming has gone mainstream.

Texas, with 5,000 gaming sector employees, allocated $95 million this year in grants to video game developers, as reported by The New York Times. Texas offers a 20 percent reimbursement incentive to game developers who spend at least $3.5 million, along with a sales tax exemption.

The Louisiana Digital Gaming Initiative is an economic incentive program dedicated exclusively to growing game development there.

Proponents of gaming credits cite their difference to the film industry. Whereas a film credit encourages a studio to shoot a film in a state and then leave, the video game credit works to persuade game developers to create a permanent space with permanent jobs in the state.

So what exactly does Pennsylvania offer? Nothing, for now at least.

While it does boast a 25 percent tax credit for filmmakers who spend at least 60 percent of their production budget in the state, PA doesn’t have anything for video game developers.

Based on a 2009 study by the Entertainment Software Association – which is currently in the process of creating a new economic impact report – the gaming industry brought $41.9 million to Pennsylvania. For comparison’s sake, the incentive-laden Texas netted $491.5 million that same year, a 10-fold increase.

According to at least some local industry insiders, this lack of government incentive is keeping Philly from bating big-budget gaming companies.

“What happens is we have to send our students somewhere else. California, Washington, New York, Massachusetts, all these other places where they have an extensive gaming scene,” said Frank Lee, the Associate Professor of Game Design at Drexel, early stakeholder of the VGI effort and designer behind playing pong on a skyscraper.

The state’s university students are one of the primary motivations behind a push to get or grow big gaming firms here.

Drexel has one of the top-ranked game design programs in the U.S. and, looking at the state as a whole, Pittsburgh’s Carnegie Mellon’s computer science program is world-renowned. All told, the Philadelphia region offers at least 25 different gaming programs.

“We have some of the really fantastic gaming schools,” said Lee, but Philadelphia is the only one of the country’s biggest five cities to be without a large-scale ‘AAA‘ game development company — despite efforts to build one. “And we have my students who graduate, going to work for Microsoft, making $100 thousand-plus. That’s that money and that tax base leaving Pennsylvania.”

That’s one way to get the attention of state legislators, a gaggle of whom visited last fall Lee’s gaming program, which is now based out of Drexel’s interdisciplinary ExCITe Center at 3401 Market Street.

A new bill, SB 1035, by Senate Majority Leader Dominic Pileggi (R) would expand the existing film production tax credit – which offers returns on up to 25 percent of the qualified expenses – to include “digital interactive media,” which would include video game development. Also important to note: like the existing film credit, SB 1035 would prohibit tax credits to games with “obscene material,” a definition due its own report.

According to an email exchange with Erik Arneson, a Pileggi spokesman, Temple grad and a familiar face to the Harrisburg political class, SB 1035 would “help incentivize companies to locate here because we already have a strong talent pool.”

Arneson highlights Drexel and Carnegie Mellon as incubators for talent and goes on to say that the bill’s goal “… is to attract both large and small companies to Pennsylvania, and to encourage those already here to expand their operations.
This effort is part of the fight against the “brain drain” that has caused Pennsylvania’s population to grow much more slowly than other states in recent decades.”

There have been other proposed tax credits over the years. Most recently, Senator Daylin Leach (D) proposed a credit to game developers on a per production-basis, with each company able to apply for $1 million per production per year. The statewide program would have a $20 million cap.

But, according to Stephanie Buchanan, Legislative Director for Senator Mike Brubaker (R), who is the Executive Director of the Senate Finance Committee, it is Senator Pileggi’s combined film and video game bill that will “likely be part of a budget discussion for the 2014-2015 fiscal year.”

Not everyone favors these credits.

“I don’t think it will be any use,” says Nathan Solomon, founder of the Philadelphia Game Lab, a local nonprofit that aims to network for startup game developers and organizes related events.  “We don’t need to throw millions of dollars at [a company] to come here. We need to make it easier for really talented people to stay here.”

Solomon’s perspective matters. Recently, Solomon set up shop in an office at Rittenhouse coworking space Benjamin’s Desk after earlier plans to open up an incubator slowed. From building a game company in New Orleans to now helping ones launch in Philadelphia, he’s seen the development pathway from many directions.

There has been academic work to support Solomon’s assertions. A 2013 report by the Institute on Taxation and Economic Policy, a non-partisan think tank, found that “the evidence suggests that tax incentives are of little benefit to the states and localities that offer them, and that they are actually a drag on economic growth.” The report goes on to explain that:

1. Tax incentives in fact have very little weight in a business’s decision to relocate – sure, Texas boasts to have profited from its tax policy, but few others can say the same. Moreover, as seen in the below graphic, according to a Pew report, few states are even properly evaluating their tax incentive programs.
2. Due to the intertwined nature of the U.S. economy, it’s impossible to really keep the benefit of a company’s growth in-state.
3. An unsavory consequence of relying on tax incentives is a disregard for alternative means of spurring an industry. In other words, you’d squash the nascent independent community bubbling in Philadelphia without a big company presence.
4. Tax credits sometimes appear to business owners as a sign of an otherwise stagnant economy.

Plus, as many critics have noted, it’s not like there aren’t tax credits already in place.

As Solomon points out, there are a number of existing federal subsidies for gaming companies, enticements that he says oftentimes remain unknown to small game developers.

“It seems like the tech companies here that are a little larger, that are large enough to have the resources to engage these kinds of conversations about government breaks, can take advantage of this,” he said. “The problem is that the game development entities here don’t have additional resources to put toward those dialogues.”

There’s also something to be said about the current state of video game development in Philadelphia, which, after years of struggling to develop a big studio, has instead focused on small, independent firms.

Mike Worth, one of the founders of PlayEternal, the five-person Center City shop, and former mouthpiece of the Videogame Growth Initiative quietly shuttered the effort last year. In an email, he said there’s not much left to do, with the growth of the independent scene.

While these companies are small, Philly Game Forge coworking space and Cipher Prime cofounder Will Stallwood said that’s part of what makes the local gaming segment so exciting and unique.

“I like the fact that everyone’s trying to do something new and interesting,” said Stallwood. “Everyone’s struggling and we’re all figuring out how to do it, and we’re all pooling our resources together.”