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38 Studios’ troubles could cool gaming tax breaks

Workers removed supplies from 38 Studios’ office in Providence after the company laid off all its employees and left Rhode Island on the hook for $50 million in loans.

Steven Senne/Associated Press

Workers removed supplies from 38 Studios’ office in Providence after the company laid off all its employees and left Rhode Island on the hook for $50 million in loans.

Utah offered Walt Disney Co. more than $5 million to bring hundreds of video game jobs to the state. Louisiana is spending $29 million on a new digital media center that would provide space for game publisher Electronic Arts. And about 20 states — from Michigan to Maine — offer tax incentives to any video game companies that qualify.

It turns out Rhode Island’s $75 million loan guarantee to entice former Red Sox ace Curt Schilling to move his video game company from Maynard to Providence was just an outsized example of efforts across the country to establish their own video game clusters. The field is particularly attractive because the industry is growing rapidly, the jobs carry high salaries, and the sector offers a dash of glamour.

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“There’s a tremendous amount of competition for these jobs because they are really great jobs,” said Timothy Loew, executive director of the Massachusetts Digital Games Institute in Worcester, also known as MassDiGI, the collaborative which was founded last year to support the industry.

But Loew and other industry officials acknowledged they could face a tougher time persuading Massachusetts to enact similar incentives after 38 Studios’ financial meltdown last month — which forced the company to default on its loan and layoff all of its workers. Unless Schilling can find outside investors to revive the company soon, Rhode Island taxpayers could be on the hook for more than $50 million in loans, interest, and other expenses, tarnishing the appetite for video game incentives both in Rhode Island and neighboring Massachusetts.

“It won’t be this session,” said Massachusetts State Representative John Mahoney, the Worcester Democrat who has been leading the charge in the Legislature to create incentives for the video game industry in the state. “38 Studios might take a little steam out of the effort right now.”

Such incentives already face stiff opposition on Beacon Hill from conservative Republicans, who don’t think the state should favor particular industries, liberal Democrats who object to corporate subsidies, and moderates who fret the incentives on the table are simply too expensive.

Mahoney, for instance, has proposed expanding the controversial film tax incentive program to include video game companies — similar to the approach used in Rhode Island and many other states. If approved, the legislation would allow video game companies to receive $1 from the state in tax credits for every $4 they spend making video games. Companies would then be free to sell the credits to other companies or back to the state to convert them to cash.

But while the program has helped Massachusetts attract dozens of major films and created hundreds of jobs, many economists and watchdogs have blasted it because of the size of the subsidies.

The Department of Revenue recently estimated the film tax program generates only about a 13 cents in tax revenue for every $1 given up. And over the past five years, it has cost more than $142,000 per full-time job for Massachusetts residents per year, the agency found. Critics say such programs are just as costly when applied to video games.

“It’s a big subsidy,” said Nick Kasprak, an analyst at the Tax Foundation, a nonprofit research group in Washington, D.C. “We’ve consistently found that the benefits are way overstated and they hardly ever [accomplish] what people say they will.”

Massachusetts officials have become increasingly concerned about the growth of tax deductions, credits, and exceptions. A special commission recently recommended the state reduce the number of exemptions and more carefully review the effectiveness of new ones.

“Taxpayers are already paying a tremendous amount for all these tax breaks,” said Representative Jay Kaufman, the Lexington Democrat who cochairs the Legislature’s Joint Committee on Revenue. “I’m very cautious about extending any new ones.”

Even without the incentives, Massachusetts already has a growing video game cluster with 1,300 workers in the sector — more than every state except for California, Texas, Washington, and New York, according to a 2010 report by the Entertainment Software Association, a trade group.

Loew estimated the state has roughly 100 companies in the sector, including Turbine Inc. in Needham (a unit of Warner Bros. that has marketed large online games like the Lord of the Rings Online series) and Harmonix Music Systems, the Cambridge company that developed Rock Band.

The industry also has support from a swath of venture capitalists in the region and an array of college programs dedicated to training workers for the industry, including the Massachusetts Institute of Technology, Northeastern University, Worcester Polytechnic Institute, Becker College, and Bunker Hill Community College.

But industry advocates insist they need further support from government to help encourage graduates to stay in Massachusetts — particularly with fierce competition from other states.

“If we can’t get ahead of the curve and build our capacity to absorb all these students into the workforce, we are going to lose them to other states,” said Loew of MassDiGI, noting the state has steadily lost talented workers over the years, including successful entrepreneurs like Facebook founder Mark Zuckerberg. “We want to stay on the right side of history here. We want our fair share of these jobs.”

Mahoney says he plans to renew his push for new incentives to expand the video game industry in Massachusetts starting next year. He said he already has about 20 cosponsors for the bill currently pending in the House. “These are great jobs,” Mahoney said.

Many of the biggest proponents for incentives, including Mahoney, come from Worcester, which is also the home of MassDiGI and some of the leading college programs dedicated to training workers in the industry. Mahoney became the current champion for the incentives after fellow Worcester Representative Vincent Pedone left the Legislature earlier this year.

Lieutenant Governor Timothy Murray, a former Worcester mayor, has also expressed interest in using incentives to boost the industry, though he hasn’t taken a position on any specific proposal.

“The digital and video game industry is a growing part of our innovation economy,” Murray said in a statement. “Whether or not the industry needs tax credits is an open question and the subject of debate in the Legislature.”

But with 38 Studios’ problems so fresh in the public eye, that debate appears on hold for now.

Todd Wallack can be reached at twakkck@globe.com. Follow him on Twitter @TWallack.
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