Another editorial writer in California demonstrated a total lack of understanding about the California Film & Television Tax Credit and the problem of runaway production (not to mention any understanding of how a critical California industry works).  This week it was Dan Walters writing in The Sacramento Bee.  Mr. Walters is skeptical the film incentive is having its desired effect:

As supporters told it, the tax credit makes California more competitive with rival states, has had a beneficial impact on stemming “runaway production,” and saves thousands of jobs that otherwise would vanish.

But has it?

Yes, Mr. Walters, it has.  In 2010, the decline in on-location feature filming in L.A. increased after four straight years of decline.  Feature film (movie) production days were still down 62% from their high in 1996 (this is up slightly from its record low the year prior).  Had incentivized films not accounted for 26% of all Feature activity, 2010 would have been the worst year on record for the L.A. region.  The California Film & Television Tax Credit is not, as Mr. Walter incorrectly called it, a “tax loophole”.  It is California’s only means of protecting its vital economic engine — the entertainment industry.

It’s time for California to wake up.  California is under attack. In the late 1990′s, Canada devised generous film incentives in the form of tax credits as a weapon to wage economic war on the U.S. in an attempt to capture one of the planet’s most valuable and prized industries: the U.S. motion picture and television industry–”Hollywood”.

Out-of-state tax credits had a devastating effect on California as film and television productions were sucked out of the local economy at astonishing rates.  Producers would have been fiscally irresponsible to ignore cost savings in Canada.  In a few short years, the number of Canadians employed by runaway productions from the U.S. (leaving mainly California, but also New York) doubled from 25,500 to over 53,000 as spending soared.  The spectacular effect film tax credits had in causing runaway production was quickly copied around the world and in over 40 U.S. states all eager to get a piece of the pie.

Billions of dollars each year in production spending that used to pour into the California economy is now enjoyed as spoils of war in rival states and nations.  In short, just six locations (Vancouver, Toronto, Louisiana, Georgia, New Mexico, Massachusetts) offering film incentives captured $3.2 billion in direct production spending in 2010 alone.  Historically, much of that spending occurred in California.

In the past, many factors contributed to runaway production and, regrettably, this has blinded many in the state from accepting the current reality.  Since the late 1990′s, film incentives have been the predominant factor causing runaway production.  After all, they are weapons designed for no other purpose than to cause runaway production and they are spectacularly effective in doing so.  For example, the year before Louisiana enacted its inventive (2002), production spending was just $3.5 million; in 2010, it was over $674 million, which represents a mind blowing 19,000% increase.

After a decade of relentless attack from film incentives in other states and nations, California’s signature industry is decimated:

• In 2003, over 66% of studio feature films shot in California.  In 2010, that number had dropped to less than 40%.

• In 2009, the lowest year on record, on-location shooting days for feature films in Los Angeles dropped nearly 65%.

• In 2000, Los Angeles County film industry workers earned 27% more per month than their non-L.A. counterparts.  By 2009, after a decade of unabated runaway production of high-budget films and shows (which offer the high-paying jobs), L.A.-based industry workers earned 13 percent LESS per month than their counterparts elsewhere.

• According to the Milken Institute, since Canada enacted the first tax credit program in 1997, now copied in roughly 40 states and dozens of nations, California has lost 36,000 jobs as a result.

Why was there such a drop in wages?  In the late 1990′s, movies accounted for 32% of on-location activity in L.A., whereas commercials were 11% and television (TV Sitcoms and TV Dramas) 21%.  In 2010, movies dropped to just 12% of the total, whereas television was 41% and commercials 16%.  In 2010, reality television shows accounted for the bulk of all television activity.  In sum, the productions that remain in California are the ones that spend the least money, pay the lowest wages and hire the fewest people.  Californians still see productions on the street, but not the ones that matter most.  One $20 million film spends in weeks what a typical reality show spends on two entire seasons.  Dollars spent to make a major film have a much greater ripple effect throughout the economy because they utilize such a wide array of goods and services.

The particular means of attack causing runaway production require a specific means of defense.  Bringing a knife to a gun fight will not work.    Against film incentives, California’s only means of defense is the California Film & Television Tax Credit.  And since it took  effect in 2009, California’s film incentive has been a very effective defense.  But Mr. Walters is skeptical, based on the “serious doubts” of “disinterested analysts” in the legislature:

Disinterested analysts, including the Legislature’s own budget adviser, have raised serious doubts about the credit’s supposed benefits, in part because it’s impossible to quantify how much of the subsidy goes to production that would have taken place in California without the tax credit.

A lengthy analysis by the Senate Governance and Finance Committee cataloged the doubts, noted that film companies can claim the credit on top of other state tax breaks, and suggested that before it’s extended for five more years, more objective study of its real-world economic impacts is needed.

The fact that “disinterested analysts” in Sacramento believe most productions would shoot in California anyway shows a frightening disconnect from reality.  Even worse, Mr. Walters is listening to them, if not relying on their advice.  As we have said on countless occasions, the most important kind of productions (movies in particular) are not shooting in California at levels anywhere close to the past.  The bountiful flood California enjoyed for decades is now barely a trickle.

Further, the “disinterested analysts” base much of their criticism on a Center on Budget and Policy Priorities report of incentive programs in other states, NOT California.  The report is valid for states trying to “create” a film industry with film incentives, but not in California, which is using film incentives to protect the industry already in place.  In fact,  in response to an email from Film Works, Robert Tannenwald, the author of the Center on Budget and Policy Priorities report, said California’s program “has a larger payoff” than other film incentive programs:

I have to acknowledge, overall, that film retention in California has a larger payoff than film acquisition by another state.

Mr. Walters says the  California Film & Television Tax Credit can not be justified at a time when the state is slashing public services.  And who does not lament such cuts?  Asking for an extension of the film incentive is not a matter of want, it is a matter of need.  California is in dire straits, in part,  because it has allowed the competition to dismantle one of the most valuable industries on the planet, which had been housed almost wholly in Southern California.  The film and television industry’s massive concentration in Hollywood made it the global economic powerhouse it is.  U.S.-produced Hollywood films control the global box office the way Chinese produced goods dominate shelves in Wal-Mart.  And yet, astonishingly, it’s somehow acceptable for some to let a signature state (and national) industry get dismantled?  Is it any wonder why California’s economy is in ruins?

In an attempt to relocate the film industry, states like Louisiana are spending obscene amounts of money on film incentives.  For example, to lure major films to Louisiana, the state subsidizes 30-35% of ALL production costs, which includes “below-the-line costs” for off-screen labor and “above-the-line costs” for things like star salaries.  Their incentive needs that kind of firepower because without it, productions rarely went there unless the plot called for it.   In other words: on a level playing field,  Louisiana can’t compete with California.  Indeed, no one can.  With its incentive, California can level the playing field for a fraction of what others offer.  The California incentive is just 20-25% of “below-the-line” costs only, which are typically 60% of the total budget.

Californians need to stop listening to empty rhetoric that portrays the California Film & Television Tax Credit as a form of wasteful “corporate welfare” and reject baseless claims it was influenced by campaign donations from Democrats in Hollywood.   The incentive is supported by both parties and the attempt to paint this as a partisan issue is shameful.  Instead, the overwhelming bipartisan support its getting should be applauded.  Finally, lawmakers on both sides of the aisle agree on at least one thing: Film Works for California.