Making a run for the border: Should the United States stem runaway film and television...
Publication: The George Washington International Law Review
Date: Wednesday, January 1 2003
I. INTRODUCTION
From the Academy Award winning musical Chicago1 and blockbuster action movie X-Men2 to the independent feature film My Big Fat Greek Wedding,3 Hollywood is producing an increasing number of motion pictures and television programs internationally that are intended for release
While beneficial to the producing corporations, runaway production has been detrimental to the U.S. economy, most notably in the labor sector. In the Report on the Impact of the Migration of U.S. Film and Television Production (Migration Report), issued in January 2001, the United States Department of Commerce (Commerce Department) estimated that film production and distribution contribute at least $18 billion in direct and indirect export revenues, "constituting a substantial portion of [the U.S.] overall trade surplus in services."7 The economic fallout due to runaway production is even more severe than the statistics indicate because film production and distribution are "locomotive" industries, contributing at least $20 billion annually in measurable dollars to the U.S. economy.8 A locomotive industry is one in which the "number of production workers directly working in the industry belies the true impact of the industry on the economy because so many upstream, downstream, and peripheral industries depend on the primary production plant," thus acting as a "multiplier" of the effect on the economy.9 Over 270,000 U.S. jobs directly depend upon the film industry and thousands of others are employed in secondary industries that serve the film industry on an "as needed" basis, such as caterers and carpenters, demonstrating that runaway production affects workers far beyond Hollywood.10 The exportation of production affects more states than the traditional hub of California, including New York, Illinois, Texas, Florida, and North Carolina, which all host significant entertainment production industries.11
This Note first discusses recent developments in the battle over runaway production in light of increased vertical integration in the entertainment industry and the subsequent concentration of ownership of production and distribution entities. Next, it examines government tax and other financial incentive programs of competitors of the United States in film production, focusing primarily on Hollywood's major competitor, Canada, but briefly discussing three other major players: the United Kingdom, Australia, and Ireland. It then analyzes proposed U.S. federal wage credit legislation and loan guarantee programs as well as various state incentive programs. Finally, this Note evaluates whether federal or state legislation is warranted and, as the international entertainment community becomes more interconnected, whether it is realistic for the United States to maintain a protectionist outlook. The Note concludes that incentive programs should be encouraged on the state level, perhaps through grants for displaced worker retraining and assistance programs, but proposed federal intervention in the form of tax incentives for low-budget productions targets the wrong subset of productions and would be disruptive to the traditional conduct of the entertainment business. While low-budget productions constitute a major source of revenue for several states, this Note points out that the percentage of high-budget features going abroad is increasing. Moreover, the U.S. government should be wary of favoring one segment of the entertainment industry that could lead to infringement of constitutional rights of those in other segments and incite concerns about federal interference in the marketplace.
II. WHY U.S. CORPORATIONS GO ABROAD: THE TRANSFORMATION OF THE CORPORATE STRUCTURE OF MEDIA AND ENTERTAINMENT CONGLOMERATES TO REFLECT THE TECHNOLOGICAL FUTURE
A number of factors fueling runaway film production have intensified with technological and corporate developments over the past decade, changing the means by which consumers access entertainment and increasing the demand for cheaply produced content.12 First, the motivation for producing entertainment content abroad goes beyond economics to changes in the very nature of the twenty-first century studio structure. Lone movie moguls no longer run the studios, as in the days of Chaplin, Selznick, Fox, and Mayer, among others. Instead they are run by corporate executives who work for media conglomerates-News Corp., Viacom, America Online-Time Warner, and Disney. Combined with the development of new outlets for entertainment content, this consolidation furthers companies' need for content that can be cheaply produced to leverage the maximum profits for their shareholders.
Second, the argument for deregulation and greater vertical integration within the media and entertainment industry is that it leads to greater economic efficiency and "synergy,"13 as a corporation can operate on an economy of scale by combining staffs and saving on operating expenses.14 In theory, by reducing expenses, the corporation could then pass along the savings in the form of "enhanced content" for its audience,15 although in reality these savings have not materialized because of increased production costs, as explained below.
Third, production costs have generally increased in the past decade by about 13 percent annually,16 while profit margins have shrunk to about 6.5 percent.17 One reason for this disparity is that films must be marketed individually, unlike other products that have brand name recognition, and the cost of marketing has increased twice as rapidly as that of film production.18 The Motion Picture Association of America (MPAA) estimated that the average feature film produced by a major studio in 2001 cost approximately $50 million to produce and $30 million to advertise and market, compared to about $26 million to produce and $12 million to advertise and market in 1991.19
Finally, media and entertainment corporations recognized the importance of having "guaranteed distribution outlet[s]"20 and acquired many different outlets-film, broadcast television, cable television, Internet, and digital media-as the U.S. government mandated relaxation of the media ownership rules in the 1990s.21 As corporations acquired multiple distribution outlets, the practice of "repurposing" content in different mediums developed. Repurposing is the production of content that can be aired on television channels, both over-the-air and cable, and/or as a motion picture.22 Owning multiple distribution outlets allows parent companies to repurpose creative content through various outlets without producing much more original content.23 Although repurposing is a boon for large media companies like Disney, it is a concern for premium cable channels competing with multi-media corporations.24 Showtime, for example, films most of its original series, such as The Chris Isaak Show, Soul Food, Queer as Folk, and others in Canada for between $1.2 to $1.3 million.25 The network estimates its saved costs versus filming in Los Angeles to be about $400,000 per hour-long episode.26 Even with saving on its production costs, Showtime needs access to more than one distribution outlet to recoup its costs and thus repurposes its shows on BET and VH1, its "sister" Viacom television networks.27 The combination of all the factors explained above means the upward trend of runaway production is likely to continue as corporations seek to increase profit margins and decrease costs.
III. THE RUNAWAYS' DESTINATIONS: HOW MUCH IS BEING SPENT AND WHERE
At its essence, the debate over runaway production hinges upon whether the efficiency of producing entertainment content abroad and subsequent greater returns is worth more than the value of employing workers domestically in the United States. Constant tension exists in Hollywood between the globalization of the industry, at least in part due to the corporate studio structure and improvements in production and communications technology, and the augmented ability of localities to compete in the global market. While foreign distribution of domestically produced films and television programs is a major contributor to the United States' services trade surplus, runaway production "undermines" the favorable balance of trade because "film production is counted as an import of services into the United States."28 Entertainment conglomerates argue that any "increase in the services trade deficit would be offset" by the lower cost of producing entertainment content abroad, in turn permitting them to "make more films and thus generate higher export revenues through foreign sales."29 Increased foreign sales would increase the average gross of domestically produced films and television programs, as foreign sales of rights to U.S. films usually account for more than forty-two percent of a film's revenue.30 In the Migration Report, however, the Commerce Department did not find this argument persuasive. The Commerce Department concluded "it is impossible to determine which films would not have been made but for their location in Canada or another foreign country,"31 and thus by how much export revenues have been increased, if at all.
By far the country that has had the most success wooing U.S. film and television productions is Canada, with the outflow of production totaling $2.24 billion in 1998.32 In 2000 this figure grew by thirty-seven percent, a percentage not seen since 1986.33 The United Kingdom (U.K.) is second with U.S. film productions generating about $647 million in 1999.34 Australia is third with $175 million spent by U.S. productions per year, and Ireland is fourth with about $53 million.35 The Migration Report cites four characteristics these countries have in common that contribute to their success in landing runaway productions.36 Namely, the leading countries (1) are all English-speaking nations, (2) host skilled workers, (3) offer financial and other government incentive programs, and (4) their governments encourage the growth of their domestic film markets.37
The Monitor Report, commissioned by the Screen Actors Guild (SAG) and Directors Guild of America (DGA) and released in 1999, found that between 1990 and 1998, its period of study, runaway production accelerated for two primary reasons, economic and creative. The economic benefits of producing entertainment content abroad include reduced location costs, high-quality production and post-production facilities, favorable exchange rates, wage rate differentials, and government incentive and rebate programs.38 Producing a film or television program in Canada, for example, can reduce the cost by up to thirty percent, compared to producing in the United States.39 The number of productions shot abroad for economic reasons increased between 1990 and 1998 by 185 percent,40 in part because global changes in the last decade have made it feasible for companies to take productions abroad.41 Technological advances now permit dailies and other data to be transmitted from the set to the studio almost instantaneously.42 Many foreign governments also provide training programs for workers in entertainment crafts43 and funding for the construction of state-of-the-art post-production centers, which allow special effects, editing, and other post-production work to be done abroad.44 Given the ability to digitally and electronically transmit information via computers, the modern post-production facility and technicians need not be on the same studio grounds.45 Perhaps one of the best explanations for the ability of foreign production entities to compete with Hollywood in the past decade is that new entrants start with the most advanced technology available, as compared with historical players, who generally cannot adapt with such ease:
[w]ith each new major technology shift, opportunities are created for new entrants in the marketplace. . . . Existing facilities must continue to use the previous generation of equipment until it is depreciated or paid for. As a result, their ability to quickly adopt new technologies is often hampered by the significant economic investment in prior generations of equipment.46
Foreign governments are both directly and indirectly involved in the entertainment industry, providing the funds and other support necessary to encourage the growth of what was once a cottage industry in many countries into a high-quality, experienced, essential sector of their national economy.47
Creative reasons do not factor into the causes of runaway production as much as economic reasons compel studios to go abroad. Creative reasons for producing abroad include that the script requires the location for authenticity or aesthetic purposes.48 The number of productions filmed abroad for this purpose has remained steady in recent years.49 The Commerce Department thus concluded in the Migration Report that creative runaways are not nearly as troublesome as economic runaways because the former have "long been a part of the industry."50
A. "Hollywood North": The Benefits of Producing in Canada
Canada is the primary destination of runaway productions for a number of reasons. First, compared to shooting a film or television production in the United States, one saves about twenty-five to thirty percent in production costs.51 Second, since 1990, the value of U.S. currency has increased in relation to that of Canada, Australia, and the U.K., which have "declined by 15% to 23% . . . relative to the U.S. dollar, reducing production costs abroad."52 Also, "factor costs," the price of wages and rates, have been slower to increase in other countries than in the United States, saving productions filmed in Canada at least fifteen percent in the cost of labor, goods, and services.53 The disparity between the minimum weekly salary of an assistant director in Canada, $2,927, versus one in the United States, $3,285 if the production is filmed at a studio and $4,595 if on location, is an illustration of these savings.54 Finally, and perhaps most significantly, the Canadian federal and provincial governments provide tax rebates and credits which, together with savings from currency differentials and the stunted increase of factor costs, may add up to approximately twenty-five percent of the production costs.55
1. Flight of Movies-of-the-Week Represents the Largest Blow to U.S. Production
Certain types of film and television productions have been more affected by runaway production to Canada than others. In particular, U.S. television productions of less than six weeks, termed movies-of-the-week (MOWs), declined over thirty-three percent from 1994 to 2000.56 During that time, foreign production of MOWs rose over fifty-five percent.57 One of the states most affected by the decline in MOW production is North Carolina, ranked third nationally in film and television production.58 In 1996 twenty-eight MOWs were produced in North Carolina, while only four were produced each year in 1998 and 199959 and two in 1999-2000.60 Wilmington, North Carolina, headquarters of Screen Gems Studios, has been most affected.61 Production revenue in Wilmington dropped by sixty-three percent from $242 million in 1996 to $89 million in 1999.62 A recent report on the issue from a California film industry organization, the Entertainment Industry Development Corporation, found that the U.S. share of worldwide MOW production continued to decline in 1999-2000, producing approximately a third of all MOWs.63 Canada's share, on the other hand, while declining slightly in 1999-2000, still remained at half of the world's MOW production.64 The study concluded that California was "holding onto MOWs at the expense of smaller production centers,"65 such as North Carolina.
The decline in production of MOWs in the United States is significant and intertwined with feature film production because it is on the set of MOWs where workers gain experience.66 Increased production of MOWs abroad aids other countries in developing a skilled labor force and the "technical infrastructure" to support a film industry and to "compete for larger budget productions internationally."67 MOWs were formerly the bread-and-butter for many U.S. states until the late 1990s when runaway production began to take off. MOWs generally have budgets of up to $3 million,68 but of course MOWs contribute even more to local economies because of the locomotive effect. Canadians defend the production of MOWs, however, saying it is "stealing peanuts from an elephant," and "[g]enerally big blockbuster movies are still made in LA."69
2. High-Budget Films and Television Shows Are Following in the Footsteps of MOWs
Canada has developed the infrastructure necessary to support a thriving film industry and has moved on to the second step, attracting more high-budget films. Between 1998 and 2001, the number of feature films shot in Canada increased from twenty-three to thirty-nine,70 according to a study by the Center for Entertainment Industry Data and Research, commissioned by Raleigh Studios, the largest independent entertainment studio group in the United States.71 Since Canada's federal rebates became effective in 1998, the report concluded that "U.S. production most affected . . . are feature films with gross budgets in the $10.1 to $50 million" range.72 Runaway feature film productions are particularly detrimental to the U.S. economy, as a six-week production usually "requires a budget in excess of $20 million," and also indirectly pumps money into the local economy through living and incidental expenses.73 The author of the Raleigh Studios study said "it used to be the small-budget pictures leaving the country to save money, now it's the larger-budget pictures, the bread-and-butter of the industry. And the bigger the budget the more impact there is on the local production community."74 The Canadians' argument that they are stealing the proverbial "peanuts" from the "elephant," therefore may no longer be valid.75 To further illustrate this point, one merely has to look as far as The Academy Award nominees for Best Picture in 2001, none of which were filmed in Hollywood, and three of which were made internationally.76 Meanwhile, television series are also migrating north. Examples of popular television series filmed in Canada include most of the Showtime original series, the pilot for Ed, and in the 1990s, The X-Files.77
3. Canadian Federal Incentives and Tax Credits Offer a Comprehensive Package for Both Canadian and Non-Canadian Productions
The Canadian government offers a range of federal and provincial tax incentive and financing programs designed to aid both native and international productions in an "integrated approach."78 An integrated approach aims to develop the native industry by offering tax credits that often "stimulate hiring of local personnel," in doing so creating a skilled labor force that makes the location more "attractive to local producers."79 In addition, the government seeks "investments in physical infrastructures . . . so that more and more productions can be accommodated," and then adds tax incentives "such as those for local labor expenditures . . . to further stimulate demand for local production resources."80 Government investment in the industry greatly contributed to the CDN $4.4 billion in film and television production revenues in 2001.81
On a federal level, Canadian productions are eligible for the Canadian Film or Video Production Tax Credit program.82 A "Canadian" feature film or film production is one that Telefilm Canada, a federal agency devoted to the promotion of Canadian culture, determines has:
a) significant Canadian creative, artistic and technical content, and that arrangements have been made to ensure that the copyright in the completed film will be beneficially owned by an individual resident in Canada, by a corporation incorporated under the laws of Canada or a province, or by any combination of owners described in this paragraph; or
b) that provision has been made for the production of the film under a co-production agreement entered into between Canada and another country.83
Additionally, the Minister of Canadian Heritage must certify that the production is Canadian, and a certain percentage of key individuals involved in the production process must be Canadian.84 At least seventy-five percent of all costs for services in producing the film and seventy-five percent of all post-production costs must have been paid to Canadians.85 This program provides tax credits for up to twenty-five percent of qualified labor expenditures86 with a maximum credit of twelve percent of the total production cost.87
For productions not deemed "Canadian," the federal government also offers a non-certified, capless tax credit, the Film or Video Production Services Tax Credit, "designed to encourage the employment of Canadians, by a taxable Canadian or foreign-owned corporation with a permanent establishment in Canada."88 The Minister of Finance's budget proposed a raise in the tax credit in 2003 from eleven percent to sixteen percent,89 illustrating the importance the Canadian government places on film and television production at the national level. The tax credit is calculated by multiplying the percentage (eleven percent while the new budget is pending) by the amount of qualified Canadian labor expenditures.90 "Qualified" Canadian labor expenditures are those salaries or wages paid with respect to services rendered on the production in Canada and paid to an individual who is a resident of Canada, a taxable Canadian corporation, or partnership.91 Note that only certain postproduction costs are includable, and marketing and promotion costs are not includable.92
Canadians may produce works with more than sixty countries under various co-production arrangements.93 The treaties enable Canadian co-producers to "penetrat[e] new markets and facilitat[e] project financing" to allow "Canadian producers and their foreign counterparts to pool their creative, artistic, technical and financial resources."94 Notable requirements of the co-production treaties are that the minimum financial investment of the minority-partner country be between fifteen to thirty percent, depending on the partner country or countries;95 the "[c]reative and/or technical participation is proportionate to the financial contribution of each" country;96 the co-production must be "approved by the recognized authorities in both countries;"97 and the key creative personnel, producer, and crew in control of the Canadian side of production must be Canadian citizens or permanent residents.98 Additionally, co-producing countries share the intellectual property rights to the product relative to their respective financial contributions."
In addition to tax initiatives, Telefilm Canada offers a screenwriting assistance program for Canadian writers of feature films in both French and English,100 as well as the Canada Feature Film Fund in which the government seeks to "increase Canadian audiences for Canadian feature films, aiming to capture 5% of the domestic box office" from 2000 to 2005.101 Programs included under the Canadian Feature Film Fund are those assisting screenwriters, various awards programs and film festivals to foster interest in Canadian films, the Low Budget Independent Feature Film Assistance Program, and Development, Production and Marketing Programs.102 The Development, Production and Marketing Programs utilize "performance-based" and "selective-based" criteria to determine the funds that a particular production will receive from the federal government.103 Performance-based evaluations dictate funding to "production and distribution companies based on box office results and qualitative factors," while selective criteria "allow [ ] producers and distributors who do not yet have a box office track record to produce and market films" in turn increasing the "diversity in feature film production and regional access,"104 which is a goal of great concern to the national government.
4. Provincial Programs
The provinces of Canada, like many states of the United States, have implemented programs to attract film production. British Columbia (BC) hosts the largest number of film productions in Canada,105 with 192 productions in 2000 and about 50,000 Canadians employed by the film industry.106 In 2000 foreign film and television productions accounted for sixty-five percent of the production in BC for a total of CDN$760.9 million.107 Part of the reason for EC's popularity is that it has "70 post-production facilities, 50 shooting stages" and "the ability to crew and service 35 projects simultaneously."108 BC offers four main incentive and financing programs: (1) Television and Film Financing Program (TFFP); (2) Film Incentive BC109; (3) the Feature Film Production Fund110; and (4) the Production Services Tax Credit (PSTC).111
IMAGE FORMULA 1The TFFP's purpose is to promote the development and production of BC film and television projects.112 Only entirely BC-owned and controlled independent productions are eligible for TFFP assistance.113 The TFFP umbrella encompasses two programs: "Markets in Mind" development funding,114 and the "Boosting the Box Office" marketing program.115 For the 2002-2003 year, the Markets in Mind program provided a non-recoupable advance of CDN$30,000 and CDN$50,000 for dramatic or animated television series.116 The maximum recoupable advance for Boosting the Box Office was CDN$100,000.117
Film Incentive BC provides a tax credit for twenty percent of a corporation's qualified labor expenditure in BC, if the producer of the BC portion or the whole production is a Canadian and a "BC based individual."118 "The applicant or a related BC controlled eligible production corporation must own more than 50 percent of the copyright and have control over the initial licensing."119 Film Incentive BG also provides a regional tax credit of 12.5 percent of "the corporation's qualified BC labor expenditures," where the production offices are located outside Vancouver "for the period during which principal photography . . . occurs in British Columbia outside the designated Vancouver area," and at least 85 percent of the principal photography takes place outside of Vancouver.120 Further, the program offers a credit for the training of "BC-based individuals" of the lesser of thirty percent of "payments attributable to training exceed the amount of assistance that the corporation has received" or three percent of the qualified BC labor expenditures.121 A qualified "BC labor expenditure" is the total of salary and wages and remuneration for services, including those paid up to sixty days after the end of the year that constitute at most forty-eight percent of the total production cost.122 Eligible productions are those that meet the following requirements: (1) the production is delegated six out of ten Canadian content points, which a production receives by filling certain key positions with Canadians; (2) if it is a television production, each episode must be thirty minutes or longer; and (3) at least seventy-five percent of the principal photography days, post-production work, and total cost of production incurred from goods and services must have been provided by BC based individuals or companies carrying on "business through permanent establishments" in BC.123
IMAGE FORMULA 2The Feature Film Production Fund provides equity investments by British Columbia Film in dramatic or animated feature films of up to CDN$200,000, and requires that the applicant be a BC corporation and have already secured distribution contracts, with the exception of certain low-budget productions.124 The applicant must own the copyright in the production and BC residents must occupy key personnel positions and at least seventy-five percent of the salaries, wages, goods, and services expenditures must occur in BC, unless it is an international co-production subject to a treaty, in which case neither requirement applies.125 A production may, however, receive an exemption from the requirement that the executive producers be BC residents, if at least one resident receives such credit upon application to British Columbia Film.126
IMAGE FORMULA 3The PSTC is an eleven percent credit per taxation year for a "corporation's accredited qualified BC labour expenditures."127 Unlike the TFFP and Film Incentive BC, the PSTC is available to corporations that are not Canadian-owned or do not have an interest in the intellectual property rights of the film or television production.128 The statute does require that an "accredited production corporation," i.e. one that is BC-based, with a permanent establishment in BC for the primary function of producing film or video, request the credit and that the production cost be greater than CDN$100,000 for television episodes less than thirty minutes long; greater than CDN$200,000 for episodes longer than thirty minutes; or greater than CDN$1 million.129 For the 2001-2002 period, the production value of PSTCs granted totaled over CDN$1 billion.130 PSTCs were granted to over thirty-seven feature films, twenty-six television series, and fifty-five MOWs.131 Far more productions received assistance via the PSTCs in each entertainment category than the TFFP or Film Incentive BC and more total assistance was given by BC than in either of those programs, most likely because it is easiest for foreign corporations to receive the PSTC.132
Other Canadian provinces offer similar programs with a few notable additions to the usual tax credit programs. Ontario, the next largest production province in Canada,133 also offers an eleven percent production services tax credit134 and a twenty percent tax credit for Canadian or international corporations for labor expenditures on animation and special effects in Ontario.135 Further, the province offers a tax credit of up to twenty percent for labor expenditures on "interactive digital media" products with Ontario-based companies.136 Quebec provides similar tax credits for special effects and computer animation,137 as well as a film dubbing tax credit.138
IMAGE FORMULA 4B. The United Kingdom
Although this Note focuses primarily on U.S. productions that run away to Canada, for comparison purposes it is useful to examine the other top three destinations, the U.K., Australia, and Ireland, and their programs attracting U.S. productions. The Secretary of State of the U.K. is authorized by the Films Act of 1985 to "give financial assistance . . . to any person - (i) for the purpose of enabling projects to be prepared, or other preliminary work to be undertaken or steps taken, with a view to the production of relevant films; or (ii) for any purpose connected with the production of short films."139 The U.K. permits the costs to be deferred until the film has earned them back, which is advantageous for productions with box office potential.140 The calculation utilizes an "income forecast model similar to the U.S. GAAP method."141 The U.K. model also allows complete tax write-offs for films "with a total production expenditure of U.K.L15 million or less" that qualify as "British" films and were "acquired or completed on or after July 2, 1997 but before July 2, 2002."142 Films completed on or after March 10, 1992, and costing more than L15 million, or those that are "British film[s] costing less than U.K. L15 million but completed in the period March 10, 1992 to July 1, 1997, or after July 2, 2002," may be written off over three years on a straight-line basis.143 One notable feature of the British programs is that there is "no minimum British cultural content requirement necessary for qualification" as a British film.144 Additionally, the U.K. encourages film partnerships through which one may invest in a British film by forming a partnership and thus take advantage of the complete tax deduction within the taxation year, effectively "replac[ing] the role of a bank in these transactions."145
IMAGE FORMULA 5In response to a perceived "lack of a distribution infrastructure," the Department of Creative Media and the Arts created several governmental bodies to improve the viability of English films in 1998.146 These bodies are the Film Council, British Film Office, Film Education Working Group, and New Technologies groups.147 The Film Council offers funding for commercial film development of less than L10,000 for individuals and more than L10,000 for companies.148 Additional funds include a training fund for executives and writers and a New Cinema fund to stimulate "unique ideas, innovative approaches and new voices."149 The British Film Office is charged with providing information regarding the film, television and advertising industries to potential producers.150 The Film Education Working Group and New Technologies Group respectively research the "place of education in and about film" and the "implications of digital technologies for all parts of the film chain."151 In addition to funding and research programs, the government also offers formal training programs and an official graduate program, the National Film and Television School.152
The U.K.'s combination approach appears to be attracting new business, such as the co-venture between Disney and Academy-Award winning composer John Williams for Europe's first animated film studio.153 Disney will contribute twenty-five percent of the budgets and will receive the North American distribution rights in a variety of mediums.154 The parties cited European Union tax breaks and pre-wiring for appropriate digital technology at the studio site as factors in the decision to build the studio in England.155 The U.K. government's hands-on involvement in attracting production was also exemplified in its wooing of Home Box Office's production of band of Brothers.156 After a meeting between fllmmakers and British Prime Minister Tony Blair, the British Parliament passed a law to change an archaic sales lease-back law that would have inhibited production.157 In leaseback arrangements, a non-United Kingdom taxpaying company could pass the tax benefits to a domestic lessor who would then share the benefits with the foreign company.158 Co-executive producer Tony To chose England as the production location because with over 700 people working on set at one time, it would have been "cost-prohibitive to take that many people for an extended time to somewhere in Northern California, where the topography and vegetation vaguely resemble Europe," and England had the "best craftsmen in the industry outside of Los Angeles."159 Tony To's statement once again illustrates the difficulty in separating the economic and creative reasons for filming abroad into neat categories of runaway productions.
IMAGE FORMULA 6C. Australia
Australia is the third largest host nation for runaway productions.160 Well-known films produced in Australia include Mission: Impossible 2, The Matrix trilogy, the Star Wars prologue trilogy,161 and Moulin Rouge.162 Australia also plays host to Fox Studios and Warner Roadshow production facilities.163 The Taxation Laws Amendment (Film Incentives) Act of 2002 designated $A92.72 million in government funding to aid the film industry, with a 12.5 percent tax offset for productions that spend a minimum of $A15 million in Australia.164 In order to receive the offset, the film must be certified as completed on or after September 4, 2001; spend more than $A15 million in Australia;165 and those films spending "between $15 million and $50 million [ ] will need to spend at least 70 per cent of their total production budget in Australia to qualify."166 Critics of the Film Incentives Act point out that it does not apply to episodic television, which is a significant component of production in Australia, both foreign and indigenous.167 Film industry organizations, however, did receive increased funding from the government under the Film Incentives Act for both film and television production.168
IMAGE FORMULA 7In addition to government funding of production, Australia provides tax deductions for "Australian" films, which are those "made wholly or substantially in Australia" or are "official co-production[s], and have 'significant Australian content,'" according to Divisions 10BA and 10B of the Income Tax Assessment Act of 1936.169 Division 10B "allows a 100 per cent tax deduction to initial investors over two financial years, starting when the film is first used to derive income."170 Films that claim offsets under the 2002 Act will not be eligible for the Division 10B deduction.171
Like Canada and the U.K., Australia is concerned with promoting native culture and industry. Pursuant to its commitment to developing the Australian filmmaking industry, the government assists independent film makers through the SBS Independent, which "commissions quality Australian multicultural drama and documentaries;" the Australian Film Finance Corporation, which funds Australian television programs and films; the Australian Film Commission, which focuses on the development of projects; and the Australian Film, Television, and Radio School.172
IMAGE FORMULA 8D. Ireland
Ireland provides two major tax and financial incentives: Section 481 of the Taxes Consolidation Act of 1997(173) and a reduced corporate tax rate of ten percent.174 Section 481 financing applies to a film production company that: (1) meets residency and incorporation requirements; (2) is producing a film certified by the Minister for the Arts, Heritage, the Gaeltacht and the Islands; and (3) produces at least seventy-five percent of the film in Ireland or no lower than ten percent, depending on the requirements set out by the Minister for that production in its qualification certificate.175 Once a film is qualified, the amount of the deduction depends on the total cost of production, the time of year of photography began in Ireland, and other criteria as the Minister sees fit.176 The ten percent manufacturing tax rate applies to production companies where at least seventy-five percent of a film has been produced in Ireland.177 The Irish Film Board also provides production and development loans for feature length fiction films "up to a maximum of C35,000 at any one time and C70,000 cumulatively for any one project and are repayable on the first day of principal photography."178
IV. VIEWS OF THE FACTIONS: U.S. LABOR GROUPS AND ENTERTAINMENT CONGLOMERATES VERSUS EACH OTHER AND THE CANADIANS
A. Waning Labor Unions Petition for Protection
In Los Angeles County alone, the County Economic Development Corporation estimates that the entertainment industry employs nearly 242,000 people.179 The state of California, however, estimates that the figure is more in the 140,000 range.180 The University of California-Los Angeles's Anderson Forecast estimates that employment in the motion picture business fell from 151,400 in March 2001 to 133,600 in February 2002, once again showing the difficulty of pinpointing how many people are affected by runaway production because of the locomotive nature of the industry.181 Unemployment not only affects wages and salaries, but also other benefits provided by unions, such as pension funds and healthcare, which are important to the members because they are essentially independent contractors.182 Entertainment executives counter the unions' argument that the decline in production jobs is due to runaway production, saying that the decline is due to a decrease in the number of films made per year183 and other efforts to cut costs as above-the-line production costs rise while profit margins fall.184
IMAGE FORMULA 9Some labor groups that are not persuaded by entertainment executives' arguments have pressed the U.S. government to find the Canadian subsidies illegal and impose countervailing duties on imported entertainment products from Canada.185 Labor groups are divided, however, on whether or not the Commerce Department should investigate Canadian subsidies at all and whether a potential trade war is warranted.186 Proponents of a petition filed with the Commerce Department in late 2001(187) supported regulations compelling tariffs equal to the amount of the Canadian subsidy of a particular film or television production to be paid in order for it to be distributed in the United States.188 Such proponents included SAG, the Film and Television Action Committee (FTAC), and various Teamsters Locals.189 SAG viewed tariffs as a "way of raising the visibility of the issue" and stemming the "poaching" of U.S. jobs by Canada.190 Other labor groups such as the MPAA,191 DGA, the International Alliance of Theatrical State Employees (IATSE), and the American Federation of Television and Radio Artists (AFTRA) opposed countervailing tariffs because a possible trade war could result in the loss of thousands of jobs.192 Jack Valenti, President of the MPAA, stated the position of his organization as "tariffs, duties, quotas and other artificial trade barriers that would interfere with marketplace competition are wrong. They disfigure good trade policy."193 Proponents of the petition, however, said the "trade-war argument [wa]s bogus;" moreover, a trade war would be illegal under international agreements and the United States and other countries have imposed countervailing duties in the past with no trade war.194 They argued that the trade war already began when Canada offered subsidies to U.S. productions.195 The petition was withdrawn in January 2002 without prejudice.196
IMAGE FORMULA 10An additional solution proposed by entertainment executives is for labor groups to be more flexible in applying the strict union regulations on worker safety and wages.197 Union leaders protested that applying such "contract remedies" would "diminish [their] standards in order to make it more profitable for" the studios.198 U.S. unions have attempted to apply their principles worldwide. For example, in 2002 SAG decided to enforce "Global Rule One," which does not permit members of the unions to work without a SAG contract no matter where production takes place.199 SAG's move was met with approval by the Alliance of Canadian Cinema, Television and Radio Artists (ACTRA), the AFL-CIO, and the Hollywood Entertainment Labor Council,200 but with opposition from the Alliance of Motion Picture and Television Producers and its Canadian equivalent.201 SAG and AFTRA, however, waived certain requirements for U.S. productions in 2002 on a case-by-case basis, such as the requirements regarding turnaround time for actors, despite the unions' overall concerns about starting down a "slippery slope."202
IMAGE FORMULA 11This willingness to waive requirements for productions in the United States could be indicative of a wider movement to provide protection for union members internationally and to "act as a counterweight to the practice of major studios and other media giants jumping from market to market to find lower costs for their runaway productions."203 Unless countries or states are already unionized, though, it is not likely that solidarity will be a realizable goal, as studios will almost always prefer non-unionized, skilled workers to dealing with the unions. For example, in North Carolina, filmmakers are often drawn to the state because it is a "right-to-work" state, meaning that although certain positions are naturally filled with union members, it is not a requirement that the workers belong to a union, so the production company can save in overall expenses by hiring non-union workers.204 One of the historical benefits of working with a union is that the producing company is assured a certain standard of work and experience, without having to bargain about the workers' rates and benefits. With more and more foreign governments assisting in the training of workers and not necessarily requiring unionized workers, right-to-work U.S. states compete with nations around the world for productions without the additional advantage of being able to offer a favorable exchange rate.
IMAGE FORMULA 12B. Corporations Cutting Back
Film, television, and commercial producers are making a run for the border as the cost of marketing movies in the United States has risen steadily, reaching about $27 million in 2000, while profit margins have continually narrowed.205 One way of reducing the cost of the average movie or television program budget is to co-produce with a foreign company or another U.S. studio.206 Co-productions are beneficial because they decrease the costs for all parties; foreign entities view them as a "vehicle for collaboration with Americans who excel in technical and creative expertise" and, as a result, better equip them to compete with Hollywood.207 Major studios like Universal Studios, Twentieth Century Fox, and Paramount Pictures have banded together with other studios, such as DreamWorks SKG, in recent years to produce and distribute such films as Saving Private Ryan,208 Gladiator,209 and Minority Report.210 The independent film and television studios regularly take advantage of co-productions because in addition to the financial benefits, partnerships generally permit filmmakers greater creative control than if a major studio were the backer of the film or program.211
From the corporate point-of-view, producing in the United States is no longer cost efficient.212 As previously noted, the Canadian-United States exchange rate is extremely favorable towards U.S. filmmakers,213 and the average production saves a total of up to twenty-five percent, about sixty percent of which are savings on below-the-line labor costs.214 While a higher percentage of Canadian workers are unionized than their United States counterparts, the average wage for below-the-line workers is less than in the United States.215 Further, the "costs related to the acquisition and production of a movie prior to its release," so-called "negative costs," doubled between 1990 and 1999, as did the average distribution costs.216 Entertainment conglomerates dealt with this reality in the 1990s via vertical integration, layoffs, co-productions and other joint ventures, and by conducting more aggressive market research prior to production and distribution.217 As Sony Pictures Entertainment Chairman John Calley said of the television production of "Pasadena," however, "We don't want to do a TV show in Canada called 'Pasadena,' but we can't justify to our parent company the extra $200,000 per episode it costs to shoot here."218
IMAGE FORMULA 13C. Canadians See Subsidies, Tax Credits as Competitive in the Spirit of the Free Market
British Columbia Film Commission Director Mark DesRochers defended the production of "Pasadena" in Canada saying the debate about it was nothing more than a "tempest in a teapot."219 Production revenues in British Columbia, where the popular production city of Vancouver is located, were about $1.2 billion in 2000, compared to $43 billion in revenue for California,220 furthering the Canadians' argument that their industry is infinitesimal compared to that of the United States.
Canadians have their own complaints regarding the effect of runaway production on their country. ACTRA believes American film and television producers should hire more Canadians for productions.221 Presently, "[n]on-Canadian performers play most of the leading roles in productions shot in Canada, and earn almost double the minimum wage" that the average Canadian actor earns.222 ACTRA complains that U.S. productions often qualify for Canadian tax credits merely by hiring one Canadian actor or director, and has lobbied the Canadian government to better define "Canadian content" so that more pure Canadian productions will earn the tax credits.223 The 2001 "anemic performance of the Canadian sector" of the native film and television industry provided support for this proposition and increased anxiety among Ontario industry officials.224 Of particular concern, in contrast with prior years, 2001 saw foreign productions in the lead in Ontario with fifty-seven percent of the productions, while Canadian productions only accounted for forty-three percent of the total productions filmed in the province.225 From the U.S. perspective, it is cause for concern that the movies filmed in Ontario were not the small to medium-sized productions that current U.S. proposals for tax credits would relieve.226 Rather, big budget films like Don't Say a Word starring Michael Douglas and The Tuxedo with Jackie Chan were among those filmed in Ontario.227 Prime Minister Jean Chretien has defended Canadian tax credits and incentives for U.S. productions, saying, "We're competitive. That's what the world is all about," thus indicating Canada has no plan to revert to its former protectionist stance on entertainment production.228
IMAGE FORMULA 14V. SHOULD THE UNITED STATES IMPLEMENT INCENTIVE PROGRAMS MODELED AFTER THOSE OF FOREIGN GOVERNMENTS?
A. Proposed Federal Wage Credit Legislation: Relief or "Corporate Welfare"?
Legislation proposed in Congress in February 2003 would give independent film and television productions a credit of twenty-five percent of the first $25,000 of qualified wages and salaries paid during a taxable year or thirty-five percent of the same for productions in low-income communities.229 The legislation was a reincarnation of a bill introduced in the 107th Congress, but which was held up in committee.230 Independent film and television productions would qualify for the credit if: (1) the majority of principal photography days take place within the United States; (2) the production is created primarily for use as public entertainment or for educational purposes; and (3) the total cost of qualified wages is more than $200,000 but less than $10 million.231 The bill defines "public entertainment" as a "motion picture film, video tape, or television program intended for initial broadcast via the public broadcast spectrum or delivered via cable distribution."232 The definition does not include a program that is "primarily topical . . . or is produced for private noncommercial use."233 The legislation targets small and mid-sized productions, like MOWs, which the Commerce Department found were most affected by runaway production.234 Senator Blanche Lincoln (D-AR) said when introducing the original bill in 2001 that it was an effort to aid "hotels, restaurants, catering companies, equipment rental facilities, transportation vendors" and others who "benefit from these ripple effects," thus "leveling the playing field."235
IMAGE FORMULA 15Such legislation is comparable to the Canadian Film or Video Production Tax Credit program in that it offers a twenty-five percent tax credit, but is distinguishable in that it does not require that a production be qualified as a U.S. production or have a certain number of United States citizens work on the production.236 The proposal also offers no assurances that the $1.4 billion spent in Canada in 1999 on high-budget feature-length U.S. films would return to the United States.237 Further, while many co-productions with foreign countries consist of independent films that the bill addresses, there are yet many co-productions with qualified wages over $10 million but below the "high-budget" feature mark that would not receive the benefit of the tax credit, and thus would not be lured back to U.S. soil by such a program. If Congress determined that a legislative solution is desirable, it should address more than merely independent films to be effective because independents are only part of the problem. A recent study showed that the largest growth sector of projects filming in Canada were those with budgets of over $50 million.238 An independent film and television production tax credit thus would still permit this growing number of films to flee.
IMAGE FORMULA 16B. Fledgling Export-Import Bank Film Production Guarantee Program for Independent Films
The Export-Import Bank of the United States is an independent federal agency whose purpose is the aid of:
financing and to facilitate exports of goods and services, imports, and the exchange of commodities and services between the United States or any of its territories or insular possessions and any foreign country or the agencies or nationals of any such country, and in so doing to contribute to the employment of United States workers.239
In support of its mandate to support international exchanges of goods and services, the Export-Import Bank began the Film Production Guarantee Program in 2001, which cites as one of its goals to "counter[ ] foreign government economic incentives designed to lure U.S. film production abroad."240 The Film Production Guarantee Program lends only to independent film productions and requires that at least fifty percent of the production costs "relate to U.S. content."241 The program defines "independent films" as "individually-financed projects with ownership retained by the producers, who license the film rights to independent distributors throughout the world."242 "U.S. content" is that which involves "personal services, such as acting, producing, directing and filming. To the extent that such services are performed by U.S. citizens or by permanent U.S. residents, they are deemed U.S. content for purposes of meeting the 50% U.S. content eligibility requirement."243 The program does not impede upon a producer's right to partake in foreign government subsidies and incentives, provided that the U.S. content requirement is satisfied.244 Thus, this loan program requires exactly what the proposed legislation in Congress does not-a U.S. labor requirement, similar to that of foreign rebate programs. Films with loans secured by foreign distribution contracts qualified for Export-Import Bank support under this program as of 2002 include The United States of Leland, produced by and starring Kevin Spacey, and three other independent films.245
IMAGE FORMULA 17C. Concerns Over Government Involvement in Financing of the Arts
The concept of tax credits for labor expenditures has been gaining support amongst legislators and within the entertainment industry.246 Supporters include the DGA, AFTRA, and IATSE.247 Labor factions represented by FTAC, however, oppose the subsidies and support tariffs, calling government subsidies "corporate welfare" and pointing out that many of the ultimate beneficiaries would be large corporations, basically defeating the bill's purpose.248 While the U.S. Export-Import Bank's Guarantee Program remains somewhat low on the radar as far as the usual debate topics regarding runaway production, it indicates a willingness on the part of the U.S. government to provide minimal assistance to certain types of films, excluding major productions.
From an overall policy standpoint, however, the question that must be asked is: should the U.S. government even become involved in what has traditionally been a self-regulating industry? A number of Hollywood players support federal involvement, but they may do so to the industry's overall detriment. The major studios and parent corporations are undoubtedly lobbying in favor of excluding federal financial incentives for big-budget films in the legislation but, in the process, heightening the possibility of increased government involvement in Hollywood by not protesting more strongly against any government involvement.
Ever since the 1920s-an era of scandalous accounts in the press of extramarital affairs and drug use, drives for censorship of racy subject matter, and the Fatty Arbuckle political campaign scandals and murder trial-the entertainment industry has been largely self-regulated.249 In the 1920s the goal was to avoid what might have become the beginning of federal regulation and censorship by developing the organization that would become the MPAA.250 Today, First Amendment concerns support many of the industry's positions on federal issues, prompting the modern development of the MPAA ratings system251 and attempts to protect incipient digital media technology from federal mandates that would restrict further development. In October 2002 the movie ratings system celebrated its thirty-fourth anniversary and MPAA President Jack Valenti lauded the program for "endur[ing] in the marketplace because it serves parents without intruding on the filmmakers' creative vision," saying "[t]his all has been accomplished without government intrusion of any kind."252 It seems inconsistent, therefore, that the major players in the entertainment industry would support any federal involvement in financial policies affecting the entertainment industry, no matter how minor, because it could lead down a path of no return. Unlike eighty years ago, today's entertainment corporations are just that-corporations-not partnerships, not unions of artists, and not necessarily dedicated to artistic development of the craft. Rather, the modern entertainment corporation looks toward the bottom line-toward profits-which provides an additional danger when the federal government gets involved of unwarranted interference in the competitive marketplace.
IMAGE FORMULA 18VI. STATE INCENTIVE PROGRAMS COMBINING WAGE AND TAX CREDITS
In June 2001 the United States Conference of Mayors adopted the Runaway Film Production resolution recognizing "the importance of the entertainment industry and its workforce to the health and prosperity of America's cities" and urging "Congress to recognize the need for action at the federal level and adopt" the tax credit bill and other similar legislation.253 Local and state programs vary widely, depending on the state's resources and needs. The questions examined below include to what extent these programs are working, whether they are a viable alternative to federal involvement, or whether another type of program, such as federal grants, would be more effective.
IMAGE FORMULA 19A. California and the Film California First Program
California is the obvious leader in film production, as it brings in an approximate $32 billion to the state,254 and the Film California First Program, effective January 1, 2001, is an aggressive program designed to retain California's leadership in production.255 California's previously existing services include simplified procedures for filming at state properties without fees, assistance of the Highway Patrol and the State Fire Marshal, no state hotel tax, no sales or use tax on production and postproduction services, and a 4.75 percent sales tax exemption for a qualified sale or lease of postproduction equipment.256 Film California First offers reimbursements for state, federal, and local employee costs and public property use fees, public equipment fees, and film permit fees for filming on public property.257 In January 2002 Governor Gray Davis announced a proposal to expand the Film California First Program by adding a fifteen percent wage tax credit for the first $25,000 of a worker's salary for productions filmed in California.258 The State Assembly subsequently passed AB 2747 implementing the tax credit for motion pictures with budgets between $200,000 and $10 million,259 but due to state budget constraints the State Senate voted down the bill in September 2002.260
An additional, innovative state program involves listings by the California Film Commission of houses, offices, and other property that will be abandoned or demolished, and can be used for free by productions.261 The producers of The Silence of the Lambs prequel Red Dragon, for instance, used a state office building that was due to be demolished for six weeks of filming and saved about $200,000.262
California offers comprehensive services and exemption or reimbursement programs for film and television production, but does not provide tax credits for labor expenditures, as do the Canadian provinces. The only comparable provision in the California code is reimbursement for use of state, local, and federal employees in California.263 Further, the wage tax credit proposed by Governor Davis would have addressed only small and medium-sized runaway productions, which would have been good for the entertainment corporations, but bad for labor as recent data indicates the number of high-budget runaway productions is increasing.264
IMAGE FORMULA 20B. New York State and New York City Incentives
In 2000 direct expenditures on television and film productions in New York City reached almost $2.5 billion,265 while indirect expenditures reached over $5.6 billion.266 Both figures were slightly down in 1999 and 2000 from previous years. Because of the enormous impact of the film and television industries on the city, New York offers an abundance of special services for the entertainment industry, including a hotel discount program for production groups.267 New York City and New York State have worked together to promote the production of entertainment content by giving film productions the same exemptions applicable to manufacturers.268 One important provision is that machinery or equipment used on a production are exempt from sales and use taxes if "more than 50 percent of its use is directly in the production phase of a process."269 Charges for installing, repairing, maintaining, or servicing equipment and other supplies are exempt from both the New York State and New York City taxes.270 Utilities and motor fuels "used or consumed directly and exclusively in the production of a film for sale" are exempt from New York State tax, and a credit is allowed for City tax paid on electricity.271 The New York approach offers an attractive comprehensive package for film production companies. New York does not offer wage credits though, as do the Canadian provinces, which is still a significant drawback for production companies.
IMAGE FORMULA 21C. North Carolina and Wilmington Initiatives
North Carolina has consistently ranked as the third highest production center in the country since the mid-1980s.272 Industry resources in North Carolina include eight studio complexes, thirty soundstages, "400 production and support service companies[,] and a resident crew base of 1500 professionals."273 North Carolina is a "right-to-work" state, with unionized and non-unionized workers from which a crew may be chosen.274 State revenues in 2000 and 2001 totaled approximately $250 million each year, down from nearly $440 million in 1996, and the number of major productions dropped from eighty-one in 2000 to forty-four in 2001.275 These figures show a troubling trend in that the number of lower-budget productions fleeing the state is increasing.
New Hanover and Pender counties are the major production centers in North Carolina, with revenues of $66 million in 2000.276 Wilmington specifically and North Carolina in general have been hit hard by the decline in MOW and runaway film production, with film production in Wilmington dropping sixty-three percent from $242 million in 1996 to $89 million in 1999, and even further in 2000.277 In order to stem the tide of runaway production affecting New Hanover County, where Wilmington and Screen Gems Studios are located, the county approved a $90,000 annual contribution to the Wilmington Film Commission's $240,000 budget.278 The county also exempted the Wilmington Film Commission from funding reductions for five years to ensure stability of its budget and mission.279 The Wilmington Film Commission attends industry events and trade shows, and provides marketing of the area's attributes,280 which is important as North Carolina's "success is seen as the result of a heavy recruiting effort state-wide to attract" productions.281
IMAGE FORMULA 22Local initiatives by film commissions, such as increased marketing activity, are only one tool North Carolina uses to combat runaway production. Like California, Wilmington does not charge for the use of public property.282 Additionally, the Wilmington industry has begun a local incubation program to foster film productions highlighting southern American culture in conjunction with Screen Gems Studio and the University of North Carolina at Wilmington.283 The state of North Carolina also gives filmmakers a "cap of 1 percent on sales and use tax purchase or rentals of items used" in making the film.284 The consistent decline in Wilmington's film revenues over the past few years, however, would appear to indicate more action is needed, perhaps on a state or federal level.
VII. EXCESSIVE FEDERAL OR STATE LEGISLATION WOULD BE OVERLY PROTECTIONIST AND CONSTITUTE UNWARRANTED INTERFERENCE IN THE MARKETPLACE
Runaway production has been calculated to drain more than $10 billion per year from the United States, affecting states from coast to coast.285 For the entertainment industry worker, runaway production is a travesty, sending jobs abroad. For the corporate executive, it is a boon in a technological age of increased production costs and shrinking profit margins. The industry is at odds with itself, even within factions, as exemplified by labor organizations failing to agree on what solution, if any, should be implemented.
Imposing tariffs on films or television programs produced in Canada is not a viable response for two reasons. First, it could spark a trade war that studios would not want by antagonizing the Canadian industry and ending the amicable relationship that presently exists and is mutually beneficial, at least from the corporate point-of-view. Second, in a free market economy, it should be up to the dynamics of the global marketplace to determine where a film or television program may be made most efficiently.
IMAGE FORMULA 23An additional option, federal wage credits, would be a step towards combating the emigration of U.S. jobs, towards "leveling the playing field," in the words of Senator Lincoln.286 Many labor groups and corporations find wage credits agreeable because they would encourage domestic employment while returning labor expenditures to the financiers of the production. The 2001 proposed federal wage credit program would only address fleeing independent and low-budget productions, which are a fraction of the cost of high-end feature films that comprise an increasing number of the runaway productions, although not the majority, at least at this writing. Rather than limiting the wage credit to the first $25,000 of wages and salaries of productions with certain budgets, the legislation might better compete with the Canadian Film or Video Production Tax Credit program by either providing a cash refund or a credit, which would be more logistically feasible, for a certain percentage of labor expenditures, no matter what the production budget. Such a method would increase the number of productions eligible for the tax credit, include higher budget productions, and represent a more evenhanded solution by not favoring one type of production over another. One could also argue, however, that there is no need for the national government to implement a national solution to what could be seen as a localized problem. Most state and municipal governments in production areas provide a reimbursement or waiver of the sales tax on commodities or services utilized in the production process, hotel discounts, and/or waiver of fees for film permits and location fees. These strategies are generally attractive to filmmakers, but they simply cannot compete with the lower Canadian dollar, lower compensation for workers, and direct financing and subsidies from other federal and provincial governments which, when combined, add a larger percentage of savings to the budget than mere U.S. state and municipal programs.
States understandably do not have the vast resources of the federal government to assist in luring productions or to deal with the aftereffects of productions leaving. One possible way to assist in mitigating the aftereffects and minimize federal involvement in the entertainment business is to provide trade adjustment assistance. The Trade Act of 2002 reauthorized the U.S. readjustment program for workers who are displaced due to production shifts to foreign countries with whom the United States has free trade agreements,287 which would include Canada. In the Trade Act of 2002, the U.S. Congress "reiterate[d] that . . . workers are eligible for transportation, childcare, and healthcare assistance, as well as other related assistance programs administered by the Department of Labor."288 The readjustment program, in combination with grants to states for retraining of workers, could be an appropriate compromise.289 The problem with federal involvement in general is that, unlike other governments, the U.S. government generally does not subsidize the arts; rather, the marketplace dictates the economics of entertainment. From the signing of the Declaration of Independence, capitalism has ruled the federal government's approach to the arts. The U.S. government simply does not decide the superiority of or favor one art form over another. For example, while other signatories to the North American Free Trade Agreement (NAFTA) supported and received an exemption for cultural works, the United States argued against exempting cultural works because it is "antithetical to the NAFTA spirit of free trade and national treatment."290 The U.S. Congress certainly has a legitimate interest in the outcome of the battle over production because of the massive effect on the domestic economy. The U.S. government should be cautious in its approach, however, not to favor independent or television productions over high-budget feature films, since in the aggregate, high-budget productions do the most damage when they flee U.S. shores. Federal involvement through retraining and displaced worker assistance programs is the least intrusive option, maintaining the historically hands-off approach of the U.S. government towards the arts and entertainment business by merely managing the aftereffects. Accepting that runaway production will occur and dealing with the consequences may be a more prudent approach than trying to direct the economics of the entertainment industry from the outset of production.
IMAGE FORMULA 24IMAGE FORMULA 25VIII. CONCLUSION
This Note discusses a range of issues surrounding the debate about runaway production from corporate economics and tax, to labor and creative freedom issues. Distilling the debate down to its essence, local U.S. communities are suffering from runaway production because it is more economical for entertainment conglomerates to film abroad. In a competitive international marketplace it is neither realistic nor economically practical to completely halt runaway production. The balance, however, can be found in making it inviting for productions to remain in the United States through state action, with as little, impartial federal government involvement as possible.
FOOTNOTE1. CHICAGO (Miramax 2002).
2. X-MEN (Twentieth Century Fox 2000).
3. MY BIG FAT GREEK WEDDING (IFC Films 2002).
4. MONITOR CO., U.S. RUNAWAY FILM AND TELEVISION PRODUCTION STUDY REPORT 2 (1999) [hereinafter MONITOR REPORT] (defining runaway productions as "intended for initial release/exhibition or television broadcast in the U.S., but . . . actually filmed in another country"). The Monitor Report was commissioned by the Screen Actors Guild (SAG) and Directors Guild of America (DGA).
5. Id. at 2.
6. DEP'T OF COMM., REPORT ON THE IMPACT OF THE MIGRATION OF U.S. FILM AND TELEVISION PRODUCTION 3 (Jan. 18, 2001) [hereinafter the MIGRATION REPORT], available at http://www.ita.doc.gov/media/x-newfram.html.
7. Id. at 5.
8. Id.
9. Id.
10. Id. The Migration Report notes secondary and tertiary professions that serve the film industry, including carpenters, electricians, caterers, drivers, seamstresses, movers, and construction workers, among others. Id.
11. Id. Film production has been among the highest growth industries in several states other than California in recent years, including Nevada, New Jersey, Arizona, Utah, Louisiana, Washington, and Massachusetts. Id.
12. See Cross-Ownership of Broadcast Stations and Newspapers, FCC 01-262 [para] 11, 66 Fed. Reg. 194 (proposed Sept. 13, 2001) (to be codified at 47 C.F.R. pt. 73) [hereinafter Proposed Rule] for a discussion of the emergence of new media sources and rise of cable networks since 1975. In addition to cable and the Internet, the emergence of digital television will allow new channels to "materialize from every channel that currently exists," and eliminate the scarcity of spectrum and resulting limit on media outlets. KEN AULETTA, THE HIGHWAYMEN: WARRIORS OF THE INFORMATION SUPERHIGHWAY 190 (1998).
13. AULETTA, supra note 12, at 180-181. "The word was invoked five times in four consecutive sentences by Michael Eisner when he announced the merger of Disney and ABC in the summer of 1995. 'Synergy' was the mantra chanted by Westinghouse to explain its purchase of CBS, by Time Warner to defend its purchase of Turner Broadcasting, by Viacom to explain its expensive acquisition of Paramount." Id. at 180.
14. Proposed Rule, supra note 12, at [para] 25.
15. Id.
16. MONITOR REPORT, supra note 4, at 18.
17. Roger Smith, Why Studio Movies Don't Make (Much) Money, FILM COMMENT, Mar. 1, 2002.
18. Id.
19. MOTION PICTURE ASS'N OF AMERICA, 2001 U.S. ECONOMIC REVIEW 14 (2002).
20. Cynthia Littleton, CTTV Woes Hit Worrisome Note, Unit's Survival in Eye of Speculation Storm, HOLLYWOOD REP., Oct. 18, 2001.
21. See The Telecommunications Act of 1996, 47 U.S.C. [sec]202(a) (1996), which required the Federal Communication Commission to relax the media ownership regulations. See also 2002 Biennial Regulatory Review-Review of the Commission's Broadcast Ownership Rules and Other Rules Adopted Pursuant to Section 202 of the Telecommunications Act of 1996, FCC 02-249 (rel. Sept. 23, 2002) (initiating a comprehensive evaluation of the media ownership rules and providing statistics as of 2002).
22. Joe Schlosser, The Court May Set Precedent, BROADCASTING & CABLE, Nov. 5, 2001, at http://www.tvinsite.com/broadcastingcable/index.asp?layout=story&articleId=CA181083&pubdate=11/05/2001&stt=001&display=searchResults.
23. Mike Reynolds, ABC Family Holds Court, BROADCASTING & CABLE, Nov.1, 2001, at http://www.tvinsite.com/index.asp?layout=story&doc_id=54459&display=breakingNews
24. Louis Chunovic, Showtime Faces Tough Choices, ELECTRONIC MEDIA, Nov. 16, 2001, at http://www.emonline.com/topstorys/111201showtime.html. The changing dynamics of the entertainment business are forcing "even premium cable networks [to explore] new ways to share costs and new sources of back-end revenue, at the risk of diminishing their shows' present values." Id.
25. Id.
26. Id.
27. Id.
28. MIGRATION REPORT, supra note 6, at 24. Note that under the definition of "importation" in the Migration Report, importation occurs when the American consumer travels abroad to consume the service. Id.
29. Id. at 25.
30. Id. at 24 (citing MPAA statistics in BUR. OF ECON. AFFAIRS, DEP'T OF COMM., CROSS BORDER TRADE IN 1999 AND SALES THROUGH AFFILIATES IN 1998, SURVEY OF CURRENT BUSINESS (Oct. 2000), available at http://www.bea.doc.gov/bea/ail.htm).
31. Id. at 25.
32. MONITOR REPORT, supra note 4, at 3.
33. ASS'N DES PRODUCTEURS DE FILMS ET DE TELEVISION DU QUEBEC, PROFILE 2001, 19 (2001) [hereinafter ASS'N DES PRODUCTEURS, PROFILE 2001]. The events of 9/11 in the United States caused a slight downturn of approximately ten percent in filming in Canada, although service production on the west coast of Canada increased by thirteen percent during 2001-2002; thus it seems likely that this dip was an aberration, or influenced by other nations competing for U.S. business, and this Note will proceed on that assumption. ASS'N DES PRODUCTEURS DE FILMS ET DE TELEVISION DU QUEBEC, PROFILE 2003, 5 (2003).
34. MIGRATION REPORT, supra note 6, at 46.
35. Id.
36. Id.
37. Id.
38. MONITOR REPORT, supra note 4.
39. Robert Gavin, States Ask U.S. for Aid for Films Made in America, WALL ST. J., Jan. 30, 2002, at B1. In January 2002, "the U.S. dollar [was] equivalent to $1.60 Canadian." Id.
40. MONITOR REPORT, supra note 4, at 2.
41. MIGRATION REPORT, supra note 6, at 65 (citing Robert Solomon (unpublished essay)).
42. See id.
43. Id. at 69.
44. Id. at 66. Post-production "refers to important processes, such as editing, color correction, sound engineering, and creation of computer-generated images (CGI) and combining (or 'compositing') CGI with live action visual images. Post-production processes generally occur after the film has been shot." Id.
45. See id.
46. Id. at 70.
47. MONITOR REPORT, supra note 4, at 4. "As foreign crews and infrastructure have improved through experience and direct investment, their ability to handle larger, more complex productions increases." Id.
48. MIGRATION REPORT, supra note 6, at 29.
49. Id.
50. Id.
51. Suleman Din, U.S. Actors Call on Washington for Protection from Canadian Filmmakers, CANADIAN BUSINESS AND CURRENT AFFAIRS, Sept. 11, 2001 (quoting actor and director Tony Goldwyn at a meeting of American Actors at Sotheby's); see also Gavin, supra note 39, at B1.
52. MONITOR REPORT, supra note 4, at 4.
53. Id.
54. Carl DiOrio & Dave McNary, H'wood's Runaway Train, VARIETY, Feb. 4-10, 2002, at 1.
55. Din, supra note 51; Gavin, supra note 51. See discussion infra Part II.A.4.
56. MIGRATION REPORT, supra note 6, at 28.
57. Id.
58. Id. at 38.
59. Id. at 39.
60. ENTM'T INDUS. DEV. CORP., MOWs-A THREE-YEAR STUDY 6 (Jan. 2001), available at http://ww.eidc.com/MOWwebLR.pdf [hereinafter EIDC].
61. EUE/Screen Gems Studios, Credits, available at http://www.screengemsstudios. com. Wilmington is host to the continuing production of the Warner Bros, television series Dawson's Creek, and was the main location for motion pictures such as Divine Secrets of the YaYa Sisterhood, 28 Days, I Know What You Did Last Summer, Sleeping with the Enemy, The Crow, and past Sesame Street and Muppet movies. Credits, Feature Films, Wilmington (NC) Regional Film Commission, http://www.wilmington-film.com/wilmington_credits_list.asp? CreditCatID=9. See discussion of Wilmington's attempts to stem the tide of runaway productions infra Part VI.C. see also MIGRATION REPORT, supra note 6, at 39.
62. MIGRATION REPORT, supra note 6, at 39.
63. EIDC, supra note 60, at 3.
64. Id. at 4.
65. Id. at 8.
66. MIGRATION REPORT, supra note 6, at 28
67. Id. (citing a letter from Robert Solomon, Chairman, Governmental Affairs, Southern California Chapter of the Association of Imaging Technology and Sound, to Michael Fink, Federal Research Division, Library of Congress (July 5, 2000)).
68. EIDC, supra note 60, at 2.
69. DeNeen L. Brown, Hollywood's Labor Woes Send Moviemakers North: U.S. Actors View Canada as 'Scab Country,' WASH. POST, Nov. 5, 2000, at A29.
70. THE CTR. FOR ENTM'T. INDUS. DATA AND RESEARCH, THE MIGRATION OF FEATURE FILM PRODUCTION FROM THE U.S. TO CANADA AND BEYOND: YEAR 2001 PRODUCTION REPORT, tbl. 2 (2002), available at http://www.ceidr.org [hereinafter CEIDR Report].
71. Id. at 16.
72. Id. at 3.
73. MIGRATION REPORT, supra note 6, at 28.
74. Meg James, Study Finds More Films Shot in Canada; Hollywood: Report Comes in as Concerns Grow About the Economic Effects of Runaway Production, L. A. TIMES, Dec. 13, 2001, at C2.
75. See id.
76. Vernon Scott, Scott's World - UPI Arts & Entertainment, UNITED PRESS INTERNATIONAL, Mar. 21, 2002.
77. BRITISH COLUMBIA FILM COMM'N, PRODS. SHOT IN BC 1995-2000, available at http:/ /www.bcfilm.iondesign.ca/filminfo/index.php (last visited Nov. 10, 2002).
78. MONITOR REPORT, supra note 4, at 24.
79. Id. at 24-25.
80. Id. at 25-26.
81. ASS'N DES PRODUCTEURS, PROFILE 2001, supra note 33, at 4.
82. Income Tax Act [sec] 125.4 (Can.). A "Canadian" is a person who is (a) a Canadian citizen, (b) a permanent resident, or (c) a corporation that is Canadian-controlled. Income Tax Act, draft reg. 1106(1).
83. Canadian Film Development Corporation Act, art. 10(2)., R.S., c. C-8, s. 2; SI/80-153, c. 40, s. 13 (1984).
84. Income Tax Act, supra note 82, at draft reg. 1106(3).
85. Id.
86. Id. [sec] 125.4(3) (b).
87. Canadian Film or Video Production Tax Credit, Guidelines, at http://www.pch.gc.ca/progs/ac-ca/progs/bcpac-cavco/progs/cipc-cpttc/pubs/cptc_pdf.pdf (last visited Oct. 2, 2002).
88. Film or Video Production Services Tax Credit, at http://www.pch.gc.ca/progs/ac-ca/progs/bcpac-cavco/progs/cisp-pstc/index_e.cfm (last visited Oct. 2, 2002).
89. DEP'T OF FINANCE, BUDGET 2003 (2003), available at http://fin.gc.ca.
90. Income Tax Act, [sec] 125.5(3) (1998).
91. Id. [sec] 125.5(1).
92. Id. [sec]125.5(2).
93. TELEFILM CANADA, GUIDELINES, available at http://www.telefilm.gc.ca/04/41.asp.
94. Id.
95. TELEFILM CANADA, OFFICIAL COPRODUCTIONS GUIDELINES, 2000-2001, at 18.
96. Id. at 17.
AUTHOR_AFFILIATIONHeidi Sarah Wicker*
AUTHOR_AFFILIATION* The George Washington University Law School, B.A. 1999, J.D. 2003. The author would like to thank Jonathan L. Pompan for the inspiration for this Note topic, Professor Karen Brown for her assistance, and her mother for her unwavering encouragement.
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