Alabamians like low taxes, so it was surprising to read in The Messenger about the local movie theater asking the City of Troy to tax tickets.  Although unusual, businesses sometimes advocate for higher taxes (or government regulation).  The backstory in this case highlights the demise of a legal doctrine which significantly limited state and local governments.

Our local theater, Continental Cinemas, seeks a $1 surcharge on tickets, to be refunded to the theater.  The funds will help pay for improvements, including construction of a bowling alley.  In the spirit of full disclosure, my bowling ball has been gathering dust since I moved to Alabama, and I really look forward to bowling in Troy.

Refunding the tax revenue seems the equivalent of the theater just raising the ticket price themselves.  So why is Continental going to the city council at all?  Troy does not have price controls on movie tickets, so Continental can raise prices at any time.

Movie theaters are independently owned; studios have been prohibited from owning theaters since the Paramount antitrust case in 1948.  Theaters contract with distribution companies for movies, and these contracts typically involve revenue sharing.  On average, distributors receive about 60 percent of net ticket revenues.  If Continental raised the price $1, they would only get to keep 40 cents per ticket; to raise an extra $1 per ticket, Continental would have to raise the price about $2.50.  This is the rationale for a surcharge.

But I have a problem with this.  The surcharge allows Continental to do something which they contractually cannot do.  For all intents and purposes, the city would be helping a local business skate around a valid contract.

Contracts are often complicated, detailing what each party will do, creating incentives for the parties to perform as promised, and managing risk.  The willingness to sign and live up to contracts contributes mightily to value creation.  And enforcing contracts is an important task for government in a market economy.  For instance, if the distributor refused to provide movies as contracted, Continental could take them to court.  Assisting one party in contract evasion is completely contrary to government’s legitimate role here.

For many decades, the public purpose doctrine would have prevented a surcharge deal like this.  In the1820s and 1830s, states borrowed excessively and invested in companies building canals, roads, and railroads.  This excessive borrowing and spending led to the bankruptcy of eight states during an economic slump in the 1840s.

Americans responded to the state bankruptcies in two ways.  The first was imposing balanced budget rules on states, which are still in force today.  The second was to require that tax dollars be used only for public purposes, meaning things that directly benefit much of the population.  This prevented handing over tax dollars to businesses for over 100 years.

Court decisions over the past 40 years have gutted the public purpose constraint.  How has this happened?  Every company produces a product or service, hires employees, and pays taxes.  These are now called benefits to the public.  And courts now defer to elected officials on economic matters, accepting whatever a state legislature or city council declares to be a public purpose.

The demise of the public purpose constraint has contributed to a blurring of the line between business and government.  Expectations of profit and loss must guide decisions for businesses to create value.  Inserting political considerations, like keeping prices affordable or providing jobs, reduce the likelihood that businesses will create value.  It becomes really hard to argue against political control over prices, wages, and hiring if businesses have state and local governments buy and prepare plant sites, provide financing, and train workers.  When government and business become partners, the business may end up operating with all of the efficiency of the DMV.

Governments necessarily operate very differently from businesses, and businesses are less effective if run like governments.  We will be better off keeping a separation between business and government, and leaving contracts to the market. 

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision.  The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.