State tax breaks considered for video game firms

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Proponents say it's more than just free money for the Mario Brothers. But economists say backlash in Harrisburg could mean an automatic "game over."

The prize at stake: a tax break for video game companies.

States across the country are trying to siphon gaming talent from Silicon Valley with a number of new tax incentives enacted within the past few months. While the idea has never won the legislative game in Pennsylvania, it's long been a hot topic in Pittsburgh, where Carnegie Mellon's gaming programs have produced hot local firms even as most graduates flock to the West Coast.

Of the 60 students in the Class of 2010 at the Carnegie Mellon Entertainment Technology Center, four were picked up by Pittsburgh companies while 15 went to firms in California.

It matters because the business, once fueled by stacks of game tokens, has turned into one piling up real cash.

Cultlike devotion to action games like "Call of Duty" and family-friendly options like "Guitar Hero" helped video game sales exceed $20 billion in 2009. Pittsburgh's growing presence on the scene has some wondering if the sector could expand even faster here with the help of an incentive similar to the state's high-profile -- and much criticized -- film tax credit.

The timing isn't good. Economists warn that a strapped Harrisburg is not the place to look for help. Besides, analysts say tax credits may not be the lure in deciding a company's location as much as a community of like-minded peers -- so Pittsburgh should focus on building that first.

The gaming community here has been almost entirely fueled by the 11-year-old program at CMU that trains students in game development.

Drew Davidson, director of the university's Entertainment Technology Center, has joined students and local business owners in meeting with state representatives about a video game tax incentive over the years. He said the interest "goes in cycles" and is often bogged down by "so many different parties and different agendas."

Students at the center own 100 percent of the intellectual property they develop in class, leading many to graduate with a startup idea already in mind.

While no comprehensive statistics have been calculated on the scope of the city's game industry, a coalition of the Pittsburgh Technology Council, Idea Foundry and the Pittsburgh Film Office are currently conducting a gaming industry census.

"We want to have a comprehensive database of suppliers that would be invaluable for marketing the region," said Tech Council spokesman Kevin Lane.

Companies like Schell Games and Etcetera Edutainment have emerged as some of the most visible tech companies of any sector in the region. One smaller spinoff, Electric Owl Studios, created a fantasy hockey game with the Pittsburgh Penguins that last season attracted 20,000 fans and was there for the team's opening game.

Some out-of-town students are "seduced by Pittsburgh" and stay after graduation, but Dr. Davidson said a significant number predictably move west to Silicon Valley.

Other students head to a less conventional area: Raleigh and Durham in North Carolina, a state with a video game tax credit of between 15 and 20 percent for development costs more than $50,000.

It soon becomes a chicken-and-egg scenario: Are students moving because of tax incentives or because of the culture that the tax incentives have helped create?

In Georgia, for instance, game developers can receive a 20 percent tax credit on expenditures. The state also volunteers itself for product placement: An extra 10 percent kicks in if a Georgia promotional logo is featured in the video game.

The state says the incentive yielded an economic impact of $142 million after 18 months.

But before tax credits are touted as the perfect antidote, remember that regional clusters may occur simply because everyone wants to be where the action is, said Stephen Herzenberg, an economist at the Keystone Research Center who participated in a January analysis of high-tech job growth in seven states.

"It's not low taxes, but it's educational institutions. It's having a critical mass of innovative programmers -- that's the spike, in terms of software development," he said. National hot spots like Silicon Valley and Boston don't enjoy lucrative tax credits but are still magnets for ambitious talent, he said.

Pittsburgh is ahead of the game with a concentrated and established high-tech presence, he said, so any incentives should be adapted to the situation already on the ground and not grand-sweeping tax changes.

"The danger of a generic tax credit is that it's actually a windfall for the companies that get it, and it doesn't really change the rate at which these companies grow," said Mr. Herzenberg.

Perhaps the best example of how a game tax might work here is the state's film tax credit. Fans say it has helped bring about $80 million -- not to mention teen star Taylor Lautner -- to the region this past year. It has also faced some backlash in Harrisburg.

Combining the two incentives could turn Pittsburgh into a one-stop shop where films are shot and tie-in video games developed, said Dr. Davidson.

"You could stitch all these things together and create an entire fictional universe in Pittsburgh," he said.

The Pennsylvania film tax credit took a hit in the 2009-2010 budget, losing $33 million for a total of $42 million. Pittsburgh Film Office president Dawn Keezer said her outfit has to "justify the credit's existence every year" despite the millions of dollars her organization cites as evidence of its success.

The gubernatorial election has thrown another wild card into the mix, with economists unsure of how either candidate will respond in office after running in a race so focused on the state's economy.

The Republican nominee, Attorney General Tom Corbett, may have an on-the-ground source. His son, Tom, is a consultant in the Web industry and a student at Carnegie Mellon's ETC.

Even so, squeezing pennies to attract Pikachu has become less popular over the years.

"Tax credits have been pretty popular with the Legislature for the past 10 years or so," said Michael Wood, research director for the Pennsylvania Budget and Policy Center. "But once the revenue picture for the state became pretty tight, they started looking at it very carefully."

A little-known cottage industry of brokers who trade tax credits has also attracted criticism, he said.

Here's how it works: Imagine a movie shoot comes to Pittsburgh and receives a tax credit worth $300,000.

That production company can sell the credit through a broker to any business -- film or otherwise -- at around 90 percent for a cash value of $270,000. After the broker's fee is paid, filmmakers can use the cash to help finance day-to-day costs while the new tax credit owner pays less in taxes.

Descriptions of each tax credit's deadline, details and price run in Hollywood trade magazines like personal ads.

Of course, movie producers who have sold their tax credits eventually will have to pay taxes, but most films don't turn enough of a profit to pay much in taxes anyway, Mr. Wood said.

"Most films get a much bigger bang for their buck by selling the credit than actually paying taxes."

Erich Schwartzel: or 412-263-1455.


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