States Feel Pinch From Hollywood's 'Runaway Production'

by Leroy Baker, Tax-News.com, New York

04 June 2003

With production costs for the average Hollywood movie rising by 14% in the last year according to reports, producers are recognising the benefits of outsourcing production to countries that offer government-backed incentives and tax breaks.

Subsequently many states have witnessed a decline in the number of big budget movies shot within their boundaries in recent years, a trend that looks likely to continue in the short-term at least. In Hollywood-speak, this drive to take advantage of foreign tax and finance incentives and lower labor costs is known as 'runaway production.' It has resulted in some prominent movies going overseas- for example, the $125 million Matrix Reloaded was partly shot in Australia, whilst the $90 million Lara Croft Tomb Raider: The Cradle of Life was shot in Hong Kong and England.

The UK government has estimated that tax breaks generate around $319 million per year for movie producers, cutting costs by up to 12% on high profile productions such as Pearl Harbour and Harry Potter, according to Businessweek. Canada is also known to be a big lure to the US movie makers. The Canadian government offers cash credits of 11% of labor costs, which has helped cities like Vancouver earn the label 'North Hollywood' as US production companies set up shop there.

Now US based locations such as New York and Texas are seeing a fairly rapid decline in the amount of productions choosing to shoot there. Estimates state the New York City has seen the amount spent by the movie industry fall from $839 million in 1999 to $678 million in 2001. A similar picture is being painted in Texas, where expenditure fell to $140 million last year, compared to $295 million two years earlier. Similarly North Carolina (ranked 3rd in the US among movie-making states) saw a decline in the number of film projects from 81 to 44 between 2000 and 2001. The upshot of this, according to a Screen Actors Guild and Directors Guild of America report, is that runaway production is costing the country $10 billion a year.

Nevertheless, some states are determined to battle the tide by offering incentives of their own. Oklahoma has recently passed a 'Compete with Canada' act that will offer 15% cash incentive for film productions within the state, whilst North Carolina is providing a 1% sales tax cap. Minnesota, Texas and Louisiana have also passed rebate laws. New York and Illinois meanwhile are contemplating 25 per cent employee tax credit schemes.

However, just how many other states will be prepared to follow suit, and to what extent they will be prepared to spend to lure filmmakers in the current climate of fiscal hardship remains to be seen.

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