Lights, Camera -- Tax Breaks!

With more films being shot in cheap overseas locales, U.S. cities and states blitzed Cannes with incentives to lure moviemakers to America

By Suzanne Robitaille

Once accustomed to all the glamour and glitz, a sharp-eyed visitor to this year's Cannes Film Festival would have noticed something else: Marketers for American states and cities were all over the place at the confab, which ended on May 25. They chatted up passersbys, attended parties and press events, and offered personal tours to any film moguls willing to consider shooting movies in their states. They also set up small booths in hotels along the palm-tree-lined Croissette, the main drag of the town where the festival is held.

The pitch at Nevada's booth, for instance, was that the state offers 300-plus days of sunny weather and the sort of scene-setting versatility that, in past productions, has allowed it to be transformed into everything from an L.A. freeway, to Mars, to the Mideast. Oh, and Nevada also provides free permits and a mostly tax-free environment to filmmakers who shoot there. Sounds good, but the pitch wasn't enough to make many waves.

GOLDEN PRICES.

  California was there in force, of course. Entertainment brings $33 billion a year to the state's economy, and Golden State reps cruised the Croissette, dishing out colorful information about the industry's roots in California and the wonders of working in the land of Hollywood. "California has the best locations, crew, talent, infrastructure, and postproduction services found anywhere in the world," contends Karen Constine, director of the California Film Commission, who didn't attend Cannes this year. True enough. But many filmmakers hearing the pitch were undoubtedly thinking: What about the cost?

These days, American states are increasingly hard-pressed to offset the advantages offered by overseas locations. Hollywood's average cost to make and market a movie rose 14%, to $89.2 million, last year. Matrix Reloaded, which was hot at Cannes, was budgeted at $125 million -- and was partly shot in Australia. Lara Croft Tomb Raider: The Cradle of Life, another big sequel at Cannes, was scheduled to cost around $90 million to make -- and was shot in England and Hong Kong.

The U.S.-based share of such movies seems likely to decline further as producers increasingly outsource to offshore locations -- from Canada and Britain to Eastern Europe and Australia -- in a desperate effort to trim costs. Usually, multiple financing incentives and less expensive labor add to the advantages of shooting outside the U.S. The practice is dubbed "runaway production" by the American entertainment industry.

LOSING BATTLE.

  At Cannes, you couldn't help but feel that most U.S. states were fighting a losing battle to keep filming at home. Indeed, with budget deficits soaring, plenty of states couldn't even afford to send their reps to Cannes this year. Case in point: Illinois and the city of Chicago. Ironically, this year's Academy Award-winning film, Chicago, was shot mostly in Toronto. "Wage-tax credits, rebates, exemptions...these are the most influential tools to court the industry," says Richard Moskol, director of the city's film office.

Maybe, but it's easy to see why Hollywood is cutting more deals outside its home base. The British government estimates that tax breaks generate $319 million annually for movie producers, in addition to government backing. Such arrangements can help filmmakers cut production costs by 12% or more, helping to boost bottom lines on such expensive ventures as Harry Potter and the Sorcerer's Stone and Pearl Harbor. Australia and Iceland also give similar rebates for production costs. Filmmakers flock to the Czech Republic, Romania, and Morocco, too, to take advantage of dirt-cheap facilities and inexpensive technical crews.

No place understands the lure of financial incentives as well as Canada. The weak Canadian dollar already makes goods and services cheaper there, and the Canadian government gives cash payments to U.S. film outfits for 11% of their labor costs. As in Europe, filmmakers have to co-produce with a Canadian company, but this rule isn't much of a problem. Quebec, British Columbia, and other Canadian provinces offer extra subsidies, giving producers a total savings of up to 22% on wages.

HOLLYWOOD NORTH.

  Canada wins plenty of repeat film business because Toronto resembles many large American cities. Vancouver's vast topography also gives filmmakers the diversity they crave, from gritty urban streets to mountains majesty. British Columbia enticed two major studios, Red Sky Entertainment (which was acquired by International Keystone Entertainment) and Lions Gate Entertainment, to bring their headquarters to Vancouver, an area that has since been dubbed Hollywood North. By Suzanne Robitaille Many states are feeling the economic shock. In Texas, for example, entertainment production fell to $140 million last year, vs. $295 million in 2000. Only four feature films were produced in Texas in 2002, the lowest figure in 10 years. Other states are still compiling 2002 data, but North Carolina's 2001 revenues of $250 million were flat vs. its 2000 intake, and the number of major projects shot in the state dropped from 81 to 44. New York City estimates that feature-film expenditures fell to $678 million in 2001, from $839 million in 1999. In total, the impact of film and television runaway production on the U.S. is around $10 billion a year, according to a 1999 report commissioned by the Screen Actors Guild and the Directors Guild of America.

Some states are pushing hard for more tax relief and rebates to dangle before filmmakers. The Oklahoma legislature has passed a "Compete with Canada" act that provides a 15% cash-back incentive on film-production spending in the state. Minnesota, Louisiana, and Texas also have passed rebate legislation. North Carolina, the No. 3 filmmaking state, offers movie crews a 1% cap on sales taxes and use taxes related to production equipment. Illinois, New York, and other states are considering bills that would give a 25% wage tax credit per employee.

HARD SELL.

  Tax relief for a special interest, however, is a hard sell in states facing sizeable budget deficits. California, for one, is having a tough time maintaining its incentives for filmmakers. Entertainment is the state's 18th-largest industry, yet wage-based tax breaks have only been offered for films costing less than $10 million, starting in 2004. Another incentive lets productions be reimbursed for certain film costs on public land, a program so successful that all of its $7.9 million in funds have been allocated through fiscal 2003, Constine says. How long the incentive can evade cutbacks in the face of the state's yawning budget deficit is an open question.

California, among others, is hoping for federal relief. Governor Gray Davis backs the U.S. Independent Film & Television Act of 2003, which would give a 25% wage tax credit of the first $25,000 in pay for individuals involved in movie production. But Washington is strapped for cash, too, and a similar bill died in Congress last year.

This story could yet have a happy ending. The fall of the U.S. dollar, which is now down one-third from its peak vs. the euro, will help make moviemaking in America more competitive. Technology also could lend an advantage. Digital manipulation can offer virtual substitutes for real locations -- and, in turn, keep films in U.S. studios. But without stronger financial leverage for the states, a sizeable percentage of Hollywood's movie production seem likely to be riding off into an offshore sunset.

BW Online reporter Robitaille took in the glamour and glitz at the 2003 Cannes Film Festival

Edited by Thane Peterson

Before it's here, it's on the Bloomberg Terminal.
LEARN MORE