To Runaway Production

MCDONALD_FINALIZED_TWO (DO NOT DELETE) DOWN THE RABBIT HOLE: THE MADNESS OF STATE FILM INCENTIVES AS A “SOLUTION” TO RUNAWAY PRODUCTION Adrian McDonald INTRODUCTION This article examines the use of tax incentives by state and local governments to attract film and television production to their respective jurisdictions. Traditionally, the term “runaway production” is used to describe this phenomenon, which is typically framed as a negative force by national and local media. This begs the question: What is “runaway production?” While definitions of runaway production vary, the following offers a sufficient description: “Runaway production refers to films that were conceptually developed in the United States, but filmed somewhere else. If the conversation is at the federal level, runaway production goes to other countries. If at the state level, production that goes to other states is runaway.”1 In general, there are three different categories of runaway productions—(1) artificial economic runaways, (2) natural economic runaways, and (3) artistic runaways: Artificial economic runaways are films shot abroad because of artificial, or legislatively created, incentives designed to lure productions. Natural economic runaways are films that shoot abroad to take advantage of natural economic occurring phenomenon—cheap labor—that lower production costs. Artistic runaways are films that shoot abroad to artistically service the story—a film about Paris that shoots in Paris.2 1. MARTHA JONES, CAL. RESEARCH BUREAU, MOTION PICTURE PRODUCTION IN CALIFORNIA 2 (2002). Runaway films can be “creative runaways” or “economic runaways.” Id. at 35. Most industry insiders, however, will readily admit that the vast majority of runaways are for economic reasons. 2. Adrian McDonald, Through the Looking Glass: Runaway Productions and “Hollywood Economics,” 9 U. PA. J. LAB. & EMP. L. 879, 900 (2007). 85 MCDONALD_FINALIZED_TWO (DO NOT DELETE) 86 U. OF PENNSYLVANIA JOURNAL OF BUSINESS LAW [Vol. 14:1 Scope of Article This Article is divided into eight parts. Part I provides an overview of the runaway production problem, which has been an increasing threat ever since Canada enacted generous film incentives in the late 1990s, which were quickly copied around the world and, regrettably, in over forty U.S. states. Film incentives were conceived as weapons to cause runaway production and, for the present, the only means of defense the U.S. has available to fight back. However, the weapon is not currently employed to protect the nation, but it is being used by states to fight each other. Rather than fighting back with the global competition, the U.S. is effectively shooting itself in the face. Despite the catastrophic misapplication of the weapon, the cumulative effect of film incentives gave the nation a de facto national incentive allowing evidence of their effectiveness as a workable solution to runaway production to emerge based on their effect on production spending and employment in Canada. Part II explores the economic impact of the motion picture industry in the U.S. and the fundamental importance of the industry to the U.S. economy. Much of the focus concerns film and television employment statistics, which should be paramount in the minds of national policy makers in the current economic environment. Part III is an overview of how runaway production is being studied by the academic community and offers an overview of the academic discourse on the topic, which has been virtually ignored in the legal and public policy literature. Part III also provides a brief discussion of the historical role runaway production has played in Hollywood, and how the issue has been framed in the past and present by those in the entertainment industry. Part III then concludes with an examination of the recent efforts to combat runaway production and the methods for dealing with it. In 2006, there were two main policy options to fight runaway production: (1) trade action(s) to challenge the legality of film subsidies under international trade agreements, and (2) the use of “incentive to fight incentive” or “subsidy to fight subsidy” approach. Now there is only the latter, as trade remedies by the U.S. have been ruled out. The history of the ill-fated trade action filing in the U.S. is also discussed. Part IV contains a thorough overview of film incentives and how they are employed across the United States. A brief history of the rapid proliferation of film incentives across the U.S. and a discussion regarding the efficacy of film incentives in luring productions to new jurisdictions is provided. Part IV also contains an examination of the claims and arguments made by film incentive skeptics/opponents regarding the role film incentives play in location decisions for productions. Part V examines the debate over film incentives, primarily from a cost MCDONALD_FINALIZED_TWO (DO NOT DELETE) 2011] DOWN THE RABBIT HOLE 87 versus benefit perspective. A discussion of the increasingly hostile, if not disgraceful, rhetoric and tactics film incentive proponents (film backers) employ to discredit critics and skeptics of film incentive programs is also included. The concerns of film incentive critics, as time has gone on, have proven to be justified. Sadly, despite the claims of their “return on investment,” film incentives are often a monumental waste of scarce public resources that cost states billions of dollars at a time when all states offering film incentives face budget shortfalls. Part VI takes a detailed look at the impact film incentives in other states and nations have had on California. The importance of the industry to the state and its economic impact is discussed in detail. California’s response to runaway production, which consists of the California Film & Television Tax Credit, public education campaigns, and grassroots efforts, is examined and its effectiveness is evaluated in detail. Part VII examines the collective impact of the state film incentives on Canada, which, in recent decades, has pioneered the use of significant film incentives to attract runaway productions from the U.S. in an ongoing attempt to lure the relocation of a major U.S. industry with remarkable—if not frightening—success. However, while film incentives have been used as a weapon to cause runaway production, there is now evidence showing they can be used as a defense as well. Finally, Part VIII summarizes the issues raised and problems presented in this paper regarding the efficacy of film incentives. Given the state of the motion picture industry, the conclusion of this paper is that the incentive schemes enacted in many states beginning in 2002 have helped stem, stop and reverse runaway productions from leaving the nation. While this is an overall gain for the U.S. economy in terms of retained jobs, it has come at an astronomical and unsustainable cost. Federal legislation could end the race to the bottom by replacing the competing state incentives with a single national incentive. Such a national incentive would refocus the issue of runaway production as a national problem and allow the U.S. to compete more effectively in the global marketplace. As such, Part VIII offers a look at some basic models such federal legislation could take. Using state incentives to combat a national problem, runaway production, is madness; using one national incentive to combat the same national problem is a rational, effective and, most of all, imperative action for the nation to take if it wants to stop further economic decline and a loss of influence on the global stage. MCDONALD_FINALIZED_TWO (DO NOT DELETE) 88 U. OF PENNSYLVANIA JOURNAL OF BUSINESS LAW [Vol. 14:1 I. THE MADNESS OF STATE FILM INCENTIVES: THE CAUSE OF RUNAWAY PRODUCTION IS ALSO A SOLUTION REQUIRING PROPER APPLICATION Just a few years ago, much of the runaway production discussion in news, academic and government sources concerned the negative effects of runaway production on locations whose economies relied heavily on film and television production (e.g., Los Angeles) and how runaway productions might be stemmed, if not prevented. One of the primary policy options discussed in such sources to stop runaway production was the enactment of competing production incentives on par with those offered in Canada and elsewhere; to fight fire with fire, so to speak. As this article will show, production incentives do increase film and television production in locales where there had been little, if any, production before. This so- called solution to runaway production, however, is now being misused in the U.S. on a state level to weaken the strength of the movie industry at the national level. If production incentives are the primary factor causing film and television production to run away to Canada or elsewhere, then enacting a more attractive incentive would be sufficient in redirecting it from a competing location. As more and more locations attempt to do the same, the classic race to the bottom ensues. This is precisely what is happening now. In 2006, there were relatively few U.S. states (Louisiana and New Mexico, for example, were the first) and international locations (Canada, Australia, New Zealand, South Africa, etc.) that offered competitive production incentives. But as places like Louisiana and New Mexico got into the incentive game, other states watched with envy as Hollywood productions set up shop, which was incorrectly perceived as an economic boon that might be a source of new revenue for cash-strapped states. Having Hollywood “in town” is politically popular regardless of party affiliation—red and blue states alike are all on the bandwagon now. At the close of 2010, almost every U.S. state offered some level of significant production incentives in the hopes of becoming the next Hollywood North, Hollywood South . the “Hollywood anywhere.”3 Sadly, many of these cash-starved states are beginning to realize that the perceived economic benefits of film incentives are, essentially, Hollywood special effects; they may look real, but they are an illusion.

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