Economic Development

Rolling the Credits

States are competing to lure filmmakers from Hollywood by offering hefty tax breaks. Are they giving away too much?
by | March 2005
 

Near the end of the critically acclaimed movie "Ray," an emotional scene takes place in the legislative chambers of Georgia's capitol building: Lawmakers apologize to Ray Charles for having banned the singer from Georgia during segregation, and they agree to make "Georgia on My Mind" the state song. There is a quirk to the setting, however, which very few moviegoers are likely to notice. The scene wasn't shot in the Georgia capitol at all. It was shot in the Louisiana House of Representatives.

When the makers of "Ray" were preparing to film the feature in 2002, their plan was to shoot for two weeks in Georgia and then finish the rest back in Los Angeles. But around that time, Louisiana passed a lavish package of tax incentives aimed at luring Hollywood productions. The movie's producers couldn't help but notice Louisiana's generous offer. Of course, moving the production there would mean paying for hotels, meals and per diems for the cast and crew, including actor Jamie Foxx--but the bottom-line savings were too much to pass up. "On net, we were looking to save $3 million to $3.5 million on this movie," says Stuart Benjamin, one of the film's producers.

In order to maximize their tax break, the filmmakers decided to shoot nearly every scene in Louisiana. To show the rural Florida village where Ray Charles grew up, they went to a plantation southwest of New Orleans in the town of Thibodaux. To show the street outside a Seattle music club, they shot in Hammond. To show midtown Manhattan, they stopped traffic in downtown New Orleans and brought in some taxicabs. And then, of course, they shot for two days at the capitol in Baton Rouge--a nice thank you to the legislators who had passed the tax breaks only months before.

Since "Ray" swept through Louisiana, it's been nonstop "lights, camera, action" in Cajun country. Lured by Louisiana's generous incentives, more than a dozen flicks have filmed there in the past two years--including big-budget pictures such as "Mr. 3000," and the yet- to-be-released "Glory Road." This winter, four major productions were shooting simultaneously, including "The Dukes of Hazzard" and a biography of Elvis Presley. One blockbuster currently in production-- "All the King's Men," based on the life of Louisiana Governor Huey P. Long--has the state capitol once again teeming with movie stars. Meanwhile in New Orleans, where most of the filming occurs, Mayor Ray Nagin has begun referring to his city as "Hollywood South"--a title that would have sounded preposterous not very long ago, but rings absolutely true today.

Inspired by Louisiana's success, states around the country are racing to offer Hollywood tax breaks of their own. Hawaii, Illinois, Mississippi, New Mexico, New York, Pennsylvania and Utah all have recently begun throwing cash at studios and production companies. North Carolina and Texas will debate tax breaks this year, as will Georgia, where the sting of losing "Ray" hurts even more in light of its success.

Why are these states so eager to give Hollywood money? It's not just about bragging rights. Increasingly, movie production is being viewed as a growth industry that is as worthy of pursuit as biotechnology parks or manufacturing plants. It takes dozens of electricians, carpenters, make-up artists and other "below-the-line" workers to produce a big movie like "Ray"--and they make as much as $350 a day. "We're looking at this as an industry like any other," says Ward Emling, the film commissioner for Mississippi, a state that recently made news for handing out tax breaks for a new auto plant. "If you treat it like an industry that can be attracted, then you can grow it."

Others, however, worry that star-struck lawmakers are giving away too much. Louisiana, for example, bought its share of Hollywood action by handing out a fat $90 million worth of state tax credits in just two years. As quickly as producers have flooded into Louisiana, however, they could just as easily leave for a better deal somewhere else. Not long ago, Wilmington, North Carolina, was considered a movie-making hub, but its studios are reportedly sitting empty as local crews flock to New Orleans looking for work. Texas, too, is losing film workers to Louisiana and New Mexico. "When you're giving money away, people will take it," says Tom Copeland, the film commissioner in Texas. "There's no loyalty in that. I've seen it. They'll drop you like a hot potato."

THE PRICE IS RIGHT

It's nothing new for states to chase "runaway" productions, as the industry calls films made outside of L.A. Several decades ago, states began setting up film offices to make the logistics of filming on the road easy. Film commissioners help producers get permits for street closures, dig up last-minute movie props and make sure that the fire department is on hand during staged explosions. The chit they've had to offer Hollywood is a choice of locations: sandy beaches, snowy mountains, urban grit or sanitized suburbia--whatever "looks" the state has to offer.

What's new is that states are now putting money on the table, too-- and often lots of it. The reason is because global competition has altered the dynamics of the film industry. Canada dished up tax credits for foreign productions in the mid-1990s, and provinces such as Ontario, Quebec and British Columbia piled on breaks of their own. The combination of free cash and the weak Canadian dollar sent a lot of producers north of the border. They found that they could easily "cheat" U.S. locations: Toronto could be made to look like New York; Vancouver could pass for San Francisco. Canada built up a $1 billion movie industry.

Canada is now the United States' main competitor but not the only one. The Czech Republic, Australia, South Africa and other nations also began offering the studios tax breaks. And it started to pay off for those countries. For example, "Cold Mountain," the Civil War movie set in the American South, was shot in Romania. To be sure, the majority of big Hollywood features is still shot in L.A., and probably always will be. But the rise of tax breaks around the globe means that the cost-conscious producers are no longer looking solely at the best locale to make their movies. Now they're looking for the right location at the right price.

A lot of states--not just California--have been feeling the impact from that change. According to Brenda Sexton, director of the Illinois film office, some 57 movies that were "set" in Chicago since 1985 were actually filmed in Canada. Even "Chicago," the 2002 Oscar-winner, was shot in Toronto. "That was salt in the wound," Sexton says.

Nobody saw the global trends more clearly than state film commissioners, who hobnob with producers and directors at international conferences and film festivals. A few years ago, they began lobbying lawmakers back home, arguing that if the states wanted to compete for films, they, too, had to offer cash. This set up an unusual dynamic in state capitols. Lawmakers are accustomed to industries and companies asking for tax breaks--but in this case it wasn't Hollywood that was mounting the lobbying campaign. Rather, it was the state film commissioners who were lobbying Hollywood.

Louisiana's three-part package of incentives is the most generous. First, the state exempts most productions from paying sales tax. Second, Louisiana offers productions a tax credit worth as much as 20 percent of the local payroll. Both of those tax breaks are common, at varying levels, in other states. What separates Louisiana is the third item: a 15 percent investor tax credit. For a film such as Disney's "Glory Road," which spent $62 million in Louisiana last year, the investor credit alone was worth over $9 million. It's no wonder why producers are packing for New Orleans.

But other states have reeled in a bunch of films as well. New Mexico is seeing a big production boost since it passed incentives in 2002. The state gives back 15 percent on in-state production expenses and also gives producers interest-free loans of up to $7.5 million per film. (Governor Bill Richardson is known to talk up New Mexico to producers and directors at parties in L.A.)

In 2003, Illinois passed a tax credit worth 25 percent of the wages paid to state residents working on Illinois film shoots. Filmmakers spent $77 million in Illinois in 2004--up 200 percent over the previous year--which Sexton attributes to the tax breaks. She notes that "Ice Harvest," a movie that director Harold Ramis recently shot in Chicago, would have gone to Toronto without the incentives. "We were able to come within just a few dollars of the Toronto cost," Sexton says. "Lower-budget films are extremely sensitive about price. Often they won't be made at all if the project is going to exceed a certain cost."

Some of the states' success with pulling in films has to do with timing. Right about the time that states began passing tax breaks, the U.S. dollar began its dive in value. That made shooting films abroad more expensive than it had been. Canada's film output is down as productions ride the exchange rate south across the border. Those films are tending to land in states with the most lucrative tax breaks. "The tax incentives are keeping jobs in America, there's no question about it," says Albert Salzer of Crescent City Pictures, a New Orleans company that made four TV movies last year. "Just about every picture I deal with would either go to New Orleans or Canada."

HOLLYWOOD SOUTH

The headquarters of "Hollywood South" is a decidedly unglamorous industrial park on the western outskirts of New Orleans. Wide streets are lined with the squat, flat-roofed offices and warehouses of industrial supply companies. One plain, boxy building stands out from the rest, however, because of the many white trailers parked outside and the caterers shuttling lunch platters in through a loading dock.

Inside, "All the King's Men," starring Hollywood heavyweights Sean Penn, Jude Law, James Gandolfini, Anthony Hopkins and Kate Winslet, is filming. Sets depicting a hotel room and a railroad car stand in a cavernous room that is buzzing with activity between shots. Carpenters are hammering and workers are hanging a giant green backdrop against one wall, as a small crowd gathers in the glow of a laptop computer, all staring intently at the screen. When "Ray" was shooting in Louisiana, nearly all of the indoor scenes were filmed in this same studio. Since then, one production after another has moved in. "All the King's Men" is ensconced here for several weeks.

Not long ago, this place was little more than a warehouse storing old furniture. In 2000, the University of New Orleans Foundation turned it into a crude soundstage for the university's film students. The Nims Center, as the facility is now known, wasn't up to Hollywood standards. But once Louisiana passed its tax credits and filmmakers made tracks for New Orleans, it was the only place to go. So much filming goes on here now that Panavision, the camera-maker, opened a rental office across the street in January. Meanwhile, the Nims Center is expanding and going upscale. State-of-the-art editing and screening suites are under construction. The hope is that filmmakers will stay here for post-production work as well, rather than simply shooting here for the tax breaks and taking their raw footage back to Hollywood with them.

These days, New Orleans' movie action is not limited to the Nims Center. One can't spend a day in the Big Easy without seeing something being filmed somewhere. And it's not just in the French Quarter. The streets around the elegant mansions of the Garden District are seeing a lot of filming, as is the central business district. One weekend in January, "The Dukes of Hazzard" took over much of downtown to shoot what locals are calling one of the most massive car chase scenes in history.

At the moment, the biggest problem in New Orleans is that there is literally too much work to go around. Producers complain that they can't find enough qualified stagehands to work their films. Says Salzer of Crescent City Pictures, "I've gotta talk to a grip working today to see what he's doing six weeks from now. People have plenty of work to choose from." A serious effort at training the local workforce is just getting started. A new basic film production class at the Louisiana Technical College is filled with eager career-switchers.

Indeed, New Orleans is becoming a magnet for people who want to work both in front of the camera and behind it. It seems everybody has a story to tell about a native Louisianan who long ago left for L.A. but recently moved back home. Similarly, University of New Orleans film students, who used to make beelines for L.A. upon graduation, are sticking around. Timothee Hammond and Elizabeth Coulon are two recent grads who found work on "Ray." When the movie wrapped up, they started their own casting company in a small office at the Nims Center. They've built a database of 3,000 actors, mostly from Louisiana, who the studios hire for extras and bit parts. "I was in the right place at the right time," Hammond says. "People in the industry are realizing this is now an important place to be."

BROKERING TAX BREAKS

If there is one person responsible for all this, it is Mark Smith. As Louisiana's film commissioner, Smith admired Canada's success building its movie industry. He reasoned that Louisiana could accomplish the same thing if the state offered tax breaks, too. An early sign of Smith's way of thinking came in 2001, when he moved the film office from the state's tourism division into its economic development department. Then in 2002, he turned his attention to incentives. There weren't many film or video executives based in Louisiana back then, but the ones who existed got calls from Smith, encouraging them to lobby their legislators. The strategy worked. Lawmakers passed his package during a special session devoted to economic development, without much debate.

According to Smith, the tax incentives were the only way for a state with little film industry to speak of to get Hollywood's attention. "If you really want to have a film industry in the U.S.," he says, "you have to be aggressive about it." Smith recently left the film office for another state job aimed at developing an entire entertainment "cluster." "We're competing now not just with other states but globally. Policy makers and the business community have to understand that this isn't 'show-art.' It's 'show-biz.'"

You need only see all the productions taking place in New Orleans to know that the tax credits are having their intended effect. Numbers tell the story, too. In 2002, production companies shot only $20 million worth of films, television shows, commercials and music videos in Louisiana. In 2004, they shot $350 million worth. An untold amount of spending is rippling through the local economy as sales rise for caterers, lumberyards, restaurants and hotels.

Everyone in New Orleans is so giddy about Hollywood coming to town that it's hard to find anyone who seems concerned about how much the state is paying for the privilege. But that is likely to become a bigger issue as the drain on state revenues comes into focus. What's more, there is no cap on the state's exposure going forward. "The program costs the state fisc money," says Greg Albrecht, an economist with the legislature's fiscal office. "I'm not saying it's not working--heck, we had Jessica Simpson here!--but it comes at a cost."

Moreover, that cost is more than it could be. A quirk in how the tax credits work means that most studios cannot claim the credits directly. That's because they're based in California, not Louisiana. In order to get their cash, producers have to sell the credits to Louisiana taxpayers--at roughly 85 cents on the dollar. A cottage industry has cropped up to broker these deals--and take a 10 to 15 percent cut. This is an economic development program done Louisiana- style, where spreading the wealth seems almost as important as making movies. "The credits are sold to wealthy Louisiana individuals-- lawyers and doctors who have enough money to buy $10,000 worth of credits at a time--and they're totally unrelated to the movie business," Albrecht says. "I'm not sure that people are clear about who's actually benefiting from the tax credits."

For now, however, the biggest concern in Louisiana is that the Big Easy's time in the spotlight could fizzle like the acting career of a has-been starlet. What if other states--or other countries--up the ante? Already, Canada is fighting back. In the past few months, Quebec, Ontario and British Columbia all substantially boosted their tax credits for foreign film productions. When the U.S. dollar rebounds, productions could flee north just as quickly as they came south.

Smith's focus now is on making sure that doesn't happen. He wants to institutionalize the film industry in Louisiana by building up its local base of talent and crew. The tax incentives are helping in this regard, he says, by fostering an indigenous batch of local producers and financiers. Over time, Smith hopes that more screenwriters and directors will have Louisiana stories that they're burning to tell. "We don't just want to import business. We want to export our own stories," Smith says.

As for THIS Louisiana story, it will take years to judge whether it wraps happily ever after--or with an unsettling plot twist. The lesson of Louisiana's success, after all, is that movie magicians can fool the eye anywhere, for a price. Five years ago, for the movie "Double Jeopardy," filmmakers used a historic neighborhood in Vancouver to "cheat" the French Quarter. There's no stopping them from doing it again.

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