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Following the Incentive-Brick Road

Hollywood may be best identified as the home of feature film, but tax incentives in other states are creating a pattern of runaway production out of California.

From coast to coast, states and localities offering competitive tax credits and incentives have seen a surge in big-screen and TV projects making their way toward the areas providing relief. 

Meanwhile, in Hollywood, the California Film Commission and FilmL.A., Inc. are working to bring film back to Hollywood.

FilmL.A., Inc. is a private nonprofit organization that provides services for procuring film permits in the city of Los Angeles. Based on its permit and public-relations activities, the organization has been able to measure how the California film industry has seen a significant downturn over the past decade. 

“We’re seeing an extension of a pattern that we’ve seen at least in feature films for quite some time in Los Angeles, and this phenomenon we consider to be fully incentive driven,” said Philip Sokoloski, the director of communications at FilmL.A., Inc. 

In California, feature film and television productions budgeted between $1 million and $75 million are being offered a 20 percent return on all expenditures, while an extra 5 percent is being offered to independent, privately funded films and television series that previously filmed outside of California. The annual state budget toward this incentive is capped at $100 million, with money going to eligible productions on a first-come-first-served basis. These tax incentives are making a difference but are not enough to turn the ebbing tide.

In 1996, film production in the Los Angeles area reached a peak, measured by permanent production days. By 2008, the number of productions hit a new low, the result of a worsening economy and the writers’ strike, which alone cost California around $2.1 billion in output. In 2009, the film production economy hit rock bottom. 

“The only saving grace in 2010 was the existence of California state film tax credits,” said Sokoloski. “They’ve contributed to one in every four feature production days in Los Angeles.”

More than 100 films shot in California benefited from tax credits in 2010. However, figures from the Motion Picture Association of America (MPAA) show that in 2003, more than 66 percent of studio feature films were being filmed in California, compared to only 38 percent in 2010. The big-budget productions are moving out of Hollywood, and California’s dire budgetary restrictions are preventing more competitive tax credits.  

For Adam Goldberg, the creator of the Fox network’s new television comedy “Breaking In,” finding a suitable and affordable location for the show led to a number of options. 

“When we were deciding where to shoot, there was a version where we were going to shoot in Chicago,” Goldberg said. “We would have saved a little bit of money shooting there, but ultimately Sony was willing to produce in L.A. on the Sony lot.”

Creatively, working in L.A. is an advantage for Goldberg. 

“I’ve worked on another show in Vancouver called  ‘Aliens In America,’ which was shot there for the tax credits, and it was just hard on the comedy because you have to be near the actors,” said Goldberg. The show was canceled after one season.   

“For a comedy, I just thought the best thing was to keep it in L.A. so that we could be around the actors and have them a two-minute walk away,” said the producer.

“Breaking In” is set against the backdrop of Culver City, where the Sony lot is situated. The show revolves around a new heist in every episode, and by setting it in Culver City, the producers can feature the town prominently, rather than making the location vague, as is done in many other television shows. 

“Anyone who lives in L.A. wants to shoot in L.A.,” said Goldberg. “It’s just a matter of whether they can afford to or not.”

At press time, Fox announced it would be canceling “Breaking In,” along with other new shows based out of Los Angeles. Yet another blow for the industry.

 

The Competition 

The state to watch is Louisiana, dubbed “Hollywood South,” which is currently topping the list as the number-one filming hot spot outside of California. Offering 30 percent credits to any production over $300,000 on all in-state expenditures, as well as an extra 5 percent labor incentive for hiring Louisiana residents on payroll, Louisiana has the benefit of not currently having a cap on its budget allocation for film tax incentives. 

“It’s unique, comparatively, to other states in that there is no budget cap or pool of money for the amount of credits we give out in a year,” said Katie Gunnell, the director of Film New Orleans. “There’s a confidence in the industry that the credits are going to be there.”

The effect of this is significant for Louisiana’s film economy. In 2009, 24 film and television productions brought in over $220 million spent, which increased to 35 productions in 2010 and $354 million spent.

By mid-2011, 17 more productions are set in Louisiana and have already brought in $396 million, indicating that Louisiana is attracting bigger-budget productions. 

The city of New Orleans in particular has attracted a large influx of film production. Categorized within the "Tourism Related Cultural Job" industry in the city’s most recent economic-snapshot report, film and video represent a significant chunk of the more than 16,000 jobs within the city. 

“We’ve seen an incredible increase just in the amount of production in the city over the last three years,” said Gunnell. “We’ve seen the types of projects diversify, so we’re moving into television and bigger-budget projects, but we're also seeing an increase in the amount of projects.”

One of the bigger-budget independent films currently shooting in New Orleans is “Medallion,” an action-thriller starring Hollywood actors Nicolas Cage and Malin Akerman. Matthew Joynes, one of the main producers of the film, didn’t even consider filming in Los Angeles when securing a location. 

“I never look at L.A. I can’t afford L.A.!” explained Joynes. “L.A. is completely off the radar for me. If tax incentives take me to L.A., then of course I will go. The overall cost threshold is higher here, and it is uncompetitive.”

Although the script for “Medallion” set the film in New Orleans, Joynes factors tax credits as the sole reasoning behind his decision to film there.

“Tax incentives are a crucial driver for where you shoot a film,” said Joynes. “There is no other single driver for a producer to take into consideration at an independent level.”

While the fixed costs on an independent production are lower, the variable costs tend to be higher than those of the studios, like Warner Bros. or Sony Pictures, who have an infrastructure in place with their studio lots. They may have the luxury to base their filming locations on the talent rather than tax credits, but for independent productions like “Medallion,” it appears that tax credits come first, and talent comes second.

“On the independent level, new talent will be created outside of L.A., but the higher wages will drag them back here,” said Joynes.

“We’ve been shooting right in the heart of downtown New Orleans, and the sheriffs have been great,” Joynes said . “We’re not trying to double it up as being somewhere else. The film is about New Orleans, and they have been incredibly supportive of us having complete access.”

Thanks to the additional support and access, the city seems to be attracting return business. Warner Bros. filmed “Jonah Hex“ in New Orleans in 2009, and returned to film “The Lucky One” in 2010. Universal Studios, Sony Pictures and 20th Century Fox are following suit, with upcoming projects in 2011. 

Television has also made a bigger investment in the city, with shows like HBO’s “Treme” and TNT’s “Memphis Beat” using the city of New Orleans as a named backdrop and setting. 

Disney decided to film all three seasons of its hit musical-educational children’s television series, “Imagination Movers”, in New Orleans, and the show’s four main cast members are also all local residents. 

“The show was much more competitively priced for us in Louisiana than it would have been here in Los Angeles,” said Sascha Penn, creator of “Imagination Movers.” “We essentially got 35 percent back on our local spend in Louisiana, which is a lot of money.” 

“We probably couldn’t have done the show if it hadn’t been in New Orleans,” added Penn. The show received around $150,000 back for every episode, each of which cost under $500,000 to make. 

“We were the first television show to come into New Orleans after the storm [Hurricane Katrina in 2005], and 95 percent of our crew was local,” said Penn. “It was a financial benefit for us, but also, it was really great having all these people from New Orleans working on the show.”

Television provides a longer gig for states, and that is why California is offering an extra 5 percent on top of the 20 percent incentive for television productions returning to California after filming previous seasons in other states. 

 

Are Tax Incentives Really Creating More Employment?

The devastating effects of Hurricane Katrina in 2005 caused the loss of more than 10,000 cultural jobs in New Orleans, where the cultural economy represents over 12.5 percent of the total jobs. 

“To be able to have a completely new industry that is hiring locals and using local resources and bringing a spotlight to the city in positive ways, it’s been an incredible opportunity for New Orleans,” said Gunnell. 

The increase in employment opportunities within New Orleans’ film industry can also be measured by union membership. Membership in Louisiana’s local chapter of the International Alliance of Theatrical Stage Employees (IATSE) has more than doubled, from around 450 members in 2010 to just under 1,000 members in 2011. 

“Just as the need rises, our local population is rising to the occasion,” said Gunnell. “The mayor’s office has been working with various industry players to put on training, to help our locals get trained and ready to work.”

Adrian McDonald, a Web content manager at FilmL.A., Inc., has conducted extensive research on state tax credits, runaway production and the effect it has on local economies. 

“When film production work is moved out of California, a lot of people who work here find diminished opportunities,” said McDonald. “Those are jobs being created outside of California in places that are incentivizing filming at the expense of the folks working here.”

However, Joynes disagrees that film industry jobs are being taken away from California. 

“I think those films that are going to stay in L.A. were always going to stay in L.A.,” said Joynes. “It’s the marginal films that have to move; the big tent-pole movies need the skill set that can only be found in L.A. so they’ll stay.”

Joynes highlights the dominance of film post-production in Hollywood, indicating it is still the industry leader in that field. 

“The big studio pictures aren’t moving to New Orleans,” said the “Medallion” producer. “What is important is the independents need to maximize [tax credits]. They aren’t going to get access to that very top level of talent anyway and they can bring on people and make it a training ground.”

Creating local training hubs is starting to play a bigger role in runaway production. The New Orleans Video Access Center (NOVAC) is part of the initiative to train local New Orleans residents in film production and post-production. It often partners with productions, such as “Treme,” to put together intensive classes, and by doing so, local residents benefit from job opportunities, while qualifying productions benefit from a further 5 percent labor-related tax incentive for hiring local workers.

According to Joynes, out of the 300 to 400 people working on set on “Medallion,” at least 80 percent of the employees are local residents. For Imagination Movers,” Penn added that out of the 95 percent of local employees on the show, a few had relocated from other states to Louisiana. 

This highlights a concern that the nonprofit group Motion Pictures Vendors Association (MPVA), based in Los Angeles, has with tax incentives and its effect on employment. Jordan Kitaen, co-owner of Quixote Studios and Smashbox Studios, is involved with MPVA and the movement to support local L.A. business, and doesn’t believe that workers migrating from California to other states for film jobs helps the economy. 

“Other states are increasing employment but not in a meaningful way,” Kitaen said. “In New Orleans and New Mexico, people have migrated and stayed because those two places have infrastructure and more stable incentives.”

“Runaway production is an excuse for below-the-line folks to move, because life is easier and cheaper just about anywhere else,” wrote Kitaen, referring to film-crew personnel. “They aren’t forced to move, at least not yet.”

 

The Future

The state of California has recently lost some large-scale productions. “Battle Los Angeles,” an apocalyptic big-budget feature set in L.A., was actually filmed in Louisiana, along with other features like “The Green Lantern” and the upcoming “21 Jump Street.” Michigan has also scored film features such as “Scream 4” and the summer blockbuster franchise “Transformers: Dark of the Moon,” while New Mexico got “True Grit,” the Marvel-based “Thor” and the award-winning AMC television series “Breaking Bad.”

“Bringing the business back to California is as easy as offering incentives,” said Kitaen. “California can offer a watered-down incentive and still eliminate the appeal of most other states.”

Kitaen did agree that this is exactly what California is attempting to do with its current credits program, but not to the extent of making it more appealing than states like Louisiana and Michigan. 

Meanwhile, L.A.'s hold on film post-production may be further challenged. In April 2011, Millennium Studios opened in Shreveport, Louisiana. The $10 million, 70,000-square-foot building is owned by Nu Images/Millennium Films, and has created jobs for locals in the area. The move is no doubt another attempt to capitalize on Louisiana’s aggressively competitive tax credits and increasing film production, and may make it all the more appealing for bigger productions to consider Louisiana for both filming and post-production.

Kitaen has also indicated that Quixote Studios is “following production out of town,” where it can take advantage of the growing business.

However, competing states are not always benefiting from aggressive tax-incentive programs. Michigan, one of the top contenders for film production outside of California, has just announced that it will be placing a very restrictive $25 million cap on its approximate 40 percent state film tax credit. This comes after Iowa suspended its film-tax-credit program when allegations of funding misuse emerged. 

Unfortunately for California, it isn’t just competing states that are vying for a meaty chunk of Hollywood’s film industry. The international tax breaks being offered in Canada, the United Kingdom and countries in Europe are also proving to be popular. 

“The challenge to Los Angeles isn’t the national states, it’s the international market,” said Joynes. 

The competitive tax credits offered in the U.K. have encouraged Warner Bros. to invest £100 million into Leavesden Studios, after having filmed all eight installments of the “Harry Potter” franchise there, safeguarding 1,500 local jobs. 

“It’s because the talent is there, and there are incentives,” said Joynes, who originates from England and is currently also producing a British film in England at the moment. “In the U.K. and France and Germany, there are real pools of high-quality people who are cheaper than in Los Angeles.”

Joynes is right to pinpoint the international market as a bigger threat to Hollywood’s film industry. The behemoth “Twilight” trilogy has been filmed predominantly in Vancouver, while recent blockbusters like “Inception,” “Hereafter” and the “Harry Potter” franchise have all been filmed in the U.K., where there is also a growing post-production industry.

For Hollywood and its supporters like FilmL.A., Inc., and MPVA, keeping film in Hollywood is becoming an increasingly challenging idea. 

“We lost aerospace, we lost the music industry, we lost all  Fortune 500 companies except Disney,” said Kitaen. “We can’t lose Hollywood.”

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