June/July 2012
Volume 32 No. 4

June 2012
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The Tax Incentives That Almost Relocated Hollywood

by Erin Somers

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Los Angeles has long been the production capital of the U.S. The very word “Hollywood” evokes images of movie stars, premieres and mansions in the hills. But what if production companies started fleeing the City of Angels in favor of Anytown, U.S.A? Could Battle Creek, Michigan or Albuquerque, New Mexico become the Tinseltown of the future? Until recently, just such a thing was poised to happen.

Paul Audley is the president of Film L.A., a private, non-profit organization that coordinates permits for on-location motion picture, television and commercial productions in Los Angeles. Audley and his team are the go-to guys for location permits for any movies shot in the region outside of a studio lot. This means that he is one of the foremost authorities on the amount of shooting that goes on in L.A. And until 2009, Audley reported, those numbers were becoming worrisome.

The reason for Audley’s concern was that from 1996 to 2008, Los Angeles saw its number of shooting days for film and TV productions drop from 14,000 to 7,000, a whopping 50 percent reduction. It wasn’t that fewer movies were being made (about 300 have been consistently released annually since ’96); it was that California had no production incentives for filmmakers. These “runaway productions,” as they came to be called, were being lured to other states — and Canada — that offered them tax breaks and refunds

Filmmaking is an expensive business. Typical budgets are in the millions of dollars, and the risk involved is huge. And, as any moviegoer can attest, there’s no guarantee that a movie is going to come out well. That’s why producers look for any break they can get on the cost of production. Such money-saving opportunities often come in the form of production incentive packages — or state governments offering producers tax breaks to make movies in their states.

Historically, California did not have a need for a film production tax incentive program. With its wealth of trained professionals, open spaces and fantastic weather, it was, for many years, the natural choice for shooting on location. But the game changed in the mid-90s, when Canada began offering subsidies for filmmakers, and producers began heading north of the border. Though they brought much of their talent with them, locals were often hired and equipment rented from Canadian houses. Money that could have gone back into the California economy was going into Canadian coffers.

Then the recession put the nail in the coffin. L.A. production declined at a steady pace over the next decade. When the financial crisis hit at the end of the 2000s, some American industries, unrelated to film and TV, were essentially ruined. But the States weren’t going to take it lying down. Their solution? Attract business from the still-thriving entertainment industry to pump money into state economies, create jobs and drum up tourism.

States like Michigan, which was leveled by the demise of the auto industry, enacted production incentive legislature to attract film crews. When it passed the plan in 2008, it was the aim of the Michigan government to have the most aggressive incentive program in the country. Filmmakers like local boy Michael Moore, who sojourned to the Great Lake State to make movies, stood to receive a refund of 42 percent of their spending.

According to Ken Droz at the Michigan Film Office, the program is paying off. “The results have been quite substantial,” he said. “In the first nine months, 35 projects were made, including documentaries, reality shows, features and episodic shorts. The gamut. The total gross spend was $125 million in 2008. And last year those figures were increased to 52 projects with a gross spend of $223 million.”

It wasn’t just Michigan jumping on the tax refund bandwagon. By 2008, 45 states had thrown their hats into the incentive ring, and California was not among them. Until finally, it was.
In February 2009, California passed a refund plan of its own. Perhaps pressured by the state’s most profitable industry, perhaps spurred on by a governor (former actor Arnold Schwarzenegger) who is particularly sensitive to the issue, California enacted legislation that offered a credit of 20-25 percent of money spent by productions.

So why did California hold out so long? “There’s concern in many of the states that they’re losing money on these tax incentive programs,” said Audley, elaborating that there’s not a lot of data out there to show that the plans are worthwhile. Michigan’s Droz likewise pointed to a dearth of data as the reason why state government might be hesitant to take the tax credit plunge. “It’s too early to measure whether [our program] has shown a net profit to the state. We don’t have any real studies yet.” Nevertheless, by the fourth quarter of 2009, production days in L.A. had already increased by 13 percent.

With production in California now incentivized, it seems that it would be game over for other states. But Pacey Foster, a professor of Management and Marketing at the University of Massachusetts, Boston, is of the opinion that the situation is much more complicated than that. Foster, who along with fellow UMass professor David Terkla, recently conducted an in-depth study of the film and television business in Massachusetts, believes that other states are increasingly competing with the country’s traditional production centers. Massachusetts, they found, has the fifth-highest film and television industry growth rate in the nation.

Foster’s approach to the idea of new production hubs is one of realism. In an interview with VideoAge, he cautioned that not every town in America had the potential to become the next Hollywood. “I don’t think you can win with every state in this,” he said. “You have to have a crew, equipment, post-facilities, etc. You have to look at what the factors are that really make states viable as production centers. Which factors matter most and at what times? A lot of work needs to go into these.”

Though Foster’s study proved that production is booming in his home state, he said that the nature of the production is rarely big, glossy feature films. “It’s not just about Hollywood,” he said. “It often turns into a ‘Hollywood East’ thing, and yeah, that’s one that that could happen. Or we could become the nonfiction cable production center of the country. The state is going gangbusters doing PBS-type stuff. So that’s not really about Hollywood.” And although feature films help develop the local crew base, Foster said the stats show that most of the tax credits are being claimed by commercials.

Further complicating matters is the fact that without a pool of local artists, production incentive programs may not be able to sustain themselves. Especially with feature films, the trend has been that a production company from L.A. breezes in for a few days of shooting with a crew from California, and then returns home to complete post-production. While they are in town, they pump money into the local economy, but it is by no means a self-sustaining industry.
Lisa Strout, who heads the New Mexico Film Commission, said her challenge has been to encourage the local talent so that funds don’t just go to L.A. production companies looking for a tax break. “Our goal is to nurture the local talent,” she said. “So its not just the technical crews being based out of New Mexico. We’re trying to nurture the directors, actors, producers and writers so there’s that form of sustainability.” But have these efforts worked? “We don’t know how many local production companies have cropped up,” she said. “But it’s definitely growing.”

For now, it looks like Anytown, U.S.A is unlikely to usurp Los Angeles as the country’s production hub. Still, as a means of boosting the local economy, production tax breaks may prove to be a good idea. As L.A. Films’ Audley pointed out, “With the film industry, you don’t have to wait to build a factory to start building cars,” he said. “They can be there tomorrow and start making movies.”

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