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Who Wants to Be Hollywood East?

An expert in government subsidies for film production says it's a "race to the bottom."

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Last week, with a deal pending that would turn the mostly empty Ryerson steel plant on the west side into a film production studio, I talked to Cornell University professor Susan Christopherson. The potential buyers for the property want financial help from the city and the state, and Christopherson has been studying film-industry subsidies for a couple decades. Her major paper on the subject, "The Creative Economy as Big Business," will be published in the Winter 2010 Journal of Planning Education and Research. In it, she and coauthor Ned Rightor conclude that government investment in studios is almost always unwise, locking the public into production subsidies that mostly benefit huge—and distant—global corporations.

Without subsidies it's likely that there won't be enough business to cover the overhead, they say, unless the studio owner is also a producer who can keep the facility busy with in-house projects. The proposed new studio on the Ryerson property would be operated by Cinespace, a Toronto firm that has a successful 20-year track record in the facility business but doesn't make its own films.

Especially now, when so many traditional jobs have been lost, "everybody wants to be Hollywood east," Christopherson says. It's "sexy meets desperation." More than 40 states are actively vying for movie production business, upping the ante on subsidies in what she calls a "race to the bottom." For places without the necessary infrastructure and professional workforce it'll never be more than a costly fling—the subsidies will drain more tax revenue than they generate.

How much more? Rhode Island has been getting a 28-cent return on every dollar invested; Connecticut, eight cents. And once the fat incentives are gone, or another state (or country) beckons with even fatter ones, the lights, cameras, stars, and filmmakers will be gone too.

Illinois' current subsidy—which also applies to television commercials with local spending of $50,000 or more—reimburses producers for 30 percent of in-state expenses and 30 percent of wages paid to state residents. Hire from a disadvantaged neighborhood and the payback on wages bumps up to 45 percent. The rebate comes in the form of a transferable tax credit, which means the producer can sell it to another business or individual. As a simplified example, say a production company with $10 million in qualifying expenses gets an income tax credit of $3 million. That's much more than any tax liability it's likely to incur, since it's unlikely to be earning income in Illinois while making the movie. If it sells that credit at a 10 percent discount—a transaction that can be facilitated by the state film office or a broker—it nets $2.7 million, the buyer gets a $300,000 discount on taxes owed, and the state is out the whole $3 million.

When Christopherson first started studying film incentives, back in the 1980s, "the studios in Los Angeles were completely against it," she says. "They owned their facilities, and the incentives were taking away production that they needed to cover their overhead. Now they're completely in favor of it because it provides financing for their films." In fact, she notes in her paper, today's subsidies are designed by industry lobbyists like the Motion Picture Association of America.

Movie distribution is now controlled by six giant companies: Sony, Viacom, General Electric, Time Warner, Disney, and News Corp. Producers—who used to be studio employees but are now contract workers—get "squeezed by these conglomerates to find [outside] financing for their projects and to reduce production costs," says Christopherson. With today's technology they can take their business anywhere, so they can deal with the squeeze by exploiting competition among potential venues. According to Christopherson, "Location choices once made for creative reasons have been replaced by choices made for economic reasons." That's how Toronto beat out Chicago for the movie adaptation of . . . Chicago.

The first incentives were innocent little things, not even involving money. They mostly consisted of free help with matters like scouting locations and securing permits, and were offered in hopes of getting big-screen exposure that would boost tourism. But in the 1990s, Christopherson notes, some places began to add exemptions from taxes on things like equipment rental and hotel rooms. And then, in 1997, Canada instituted a "refundable" tax credit on the cost of production-crew labor. With a refundable credit, no transfer is necessary: the government just writes a check directly to the producer for the difference between the value of the credit and the taxes owed. Soon after, provinces added their own tax credits, U.S. states launched retaliatory packages, and everything escalated. Iowa's tax credit, suspended in September after allegations of fraud, had the state paying for 50 percent of anything filmed there—and, in a couple cases, for somebody's fancy new car. With bridge loans and brokers, tax credits morphed into up-front financing. And the justification for them shifted accordingly, from tourism to economic development and job creation.

But what kind of jobs are being created? "This is a project-based industry," Christopherson says. A "hire" can mean a week or a few months of work. And the industry requires a certain level of chronic unemployment, so that crews are available on demand. At the same time, "the labor supply has grown astronomically," fed by the proliferation of film schools. Especially in Los Angeles, where trained workers migrate when there's a slump at home, supply has outpaced demand. As a result, working conditions and rates of pay are deteriorating. Right now Los Angeles is "a mess," Christopherson says, with "huge industry unemployment," while aspiring film centers like Louisiana and Michigan are unable to retain the crew depth that would create a real industry.

And this is where we might have an opportunity. "Chicago has historically had a media industry, particularly strong in industrials, and an advertising industry," Christopherson says. That means it has an experienced workforce for film and television production and businesses capable of attracting the money producers spend on things like casting agents, location scouts, specialized lawyers and accountants, and equipment rentals. "Sometimes, when you're going to capture those expenditures, an incentive makes sense," she says. "It's going to work better in Chicago than it works in Des Moines." Says Illinois Film Office managing director Betsy Steinberg, "The tax credit is an absolutely vital tool in attracting production work to Illinois."

But, Christopherson notes, "It's still a question of how you're going to keep facilities full of high-value products that are going to justify the taxpayer investment." Because the really good stuff is in short supply. The projects that subsidies were aimed at, like high-end scripted television series, have been replaced by cheaper programming like reality and talk shows. And the number of midrange feature films—with budgets ranging from $20 million to $50 million—has also declined.

"There has to be a really independent analysis by the state's department of revenue—not the film office," Christopherson says. "Instead of the film office just releasing aggregate data, they should release data on who was hired, where they live, how long they worked. There has to be transparency and accountability, so the policy makers and public can figure out how much is being paid out and what you're getting back. And there has to be a sunset clause, so if it's not producing the hoped for results, it'll end."

The sunset clause in the Illinois law was dropped last winter.

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