Tax incentive programs aren't designed to support the film industry; they're designed to support the states by attracting business and tourists, but they encounter similar conflicts between politics and artistic expression. The state of Texas is considering whether to support a new Robert Rodriquez movie about illegal immigration, denounced by right wing bloggers. The state of Michigan has declined to support a horror movie featuring cannibalism.
Naturally, these controversies arouse cries of censorship from filmmakers and provocative artists, as well as free speech advocates; but perhaps because I've spent nearly 30 years as a freelance writer with no sense of entitlement to public subsidies, (though I struggled financially) I have limited sympathy for people seeking taxpayer support for work that offends taxpayer sensibilities. (My sympathy for movie studios or people with other private funding sources is especially limited.)
Still legal arguments against conditioning government support for the arts on conformity to public tastes are not frivolous. When state or federal officials decide to play the role of arts patron (either for public edification or self-promotion,) they must play it constitutionally, without discriminating on the basis of race, sex, religion, sexual orientation (obviously) and without engaging in viewpoint discrimination. As Justice Souter observed in his dissent in NEA v Finley, there is no "categorical patronage exemption from the requirement of viewpoint neutrality." Congress could not limit NEA funding to work that celebrates Christianity, or any other religion, anymore than it could bar funding for work that denigrates capitalism. In Souter's view, a bar on NEA funding of indecency, or a requirement that the NEA consider the decency of proposed work, discriminates similarly against protected speech (especially since indecency is a vague term, impossible to define objectively).
The trouble is, assessments of artistic excellence are equally vague and subjective (as Justice O'Connor stressed, writing for the majority), and determinations of excellence may implicitly or unconsciously involve viewpoint biases. Arts patronage (again) is inherently discriminatory; as a practical matter, viewpoint discrimination is unavoidable: or, as O'Connor said, "Any content based generalizations...are a consequence of the nature of arts funding."
The legal dilemmas for official arts programs are unavoidable: patronage requires discretion that governments are constitutionally prohibited from exercising. So they usually exercise it covertly, and bans on viewpoint discrimination are generally unenforceable, as are bans on giving grants to friends or friends of friends, or political or artistic soul mates. It's not as if, absent viewpoint discrimination, public arts programs would be meritocracies (even if we might agree on what constitutes artistic merit).
Government arts patronage will inevitably take middlebrow, majoritarian preferences into account; as a general rule, you can eliminate these preferences only by eliminating the programs. And, personally, as a taxpayer and writer, I have little patience for anti-establishment, avant garde artists who seek establishment support and cry censorship when it's denied.
"The smell of burning books is in the air," sculptor Richard Serra's wife declared years ago at a public hearing on the proposed removal of Tilted Arc, a massive, NEA funded Serra sculpture that bisected lower Manhattan's federal plaza. I don't think she helped his case. The sculpture was eventually removed, not on the basis of ideological objections, but because it interfered with use of the plaza by federal office workers, who, as one testified, rode to work in metal tubes and toiled in cubicles. They were not troglodytes for wanting back their unobstructed open air plaza, and federal officials did not threaten anyone's freedom by giving it to them.