[Extensions of Remarks]
[Pages E1498-E1501]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]

ARTICLE BY LANCE SIMMENS AND PAMELA CONLEY ULICH

______

HON. JOHN CONYERS, JR.

of michigan

in the house of representatives

Wednesday, August 1, 2001

Mr. CONYERS. Mr. Speaker, I submit the following insightful and
poignant article, by Lance Simmens and Pamela Conley Ulich, from the
Loyola of of Los Angeles Entertainment Law Review, for publication in
the Congressional Record.

``Bye, Bye Miss American pic, drove my Daimler to the movies
to see a foreign-

[[Page E1499]]

made flic; And good old actors were drinking whiskey
and beer, singing this is the day we're unemployed
here, this will be the day we're unemployed here.''

I. Introduction

Globalization profoundly impacts traditional ways of
conducting business, and the entertainment industry is not
immune from the new economics drastically changing the world.
Could Hollywood become ``Hollyhasbeen''? Will television and
theatrical motion pictures shot in the United States go the
way of the American car and American-made clothing?
Runaway production has caused serious labor issues,
including the dislocation of thousands of workers and jobs.
In 1998, twenty-seven percent of films released in the United
States were produced abroad, and an estimated 20,000 jobs
were lost to foreign countries. Lower exchange rates, direct
government subsidies and lower labor wages enticed American
production companies to film in foreign locales. In 1998, the
direct economic loss of runaway production was $2.8 billion.
When coupled with the loss of ancillary business, the losses
likely totaled $10.3 billion for 1998 alone. These loses
juxtapose with the issues of free trade versus fair trade in
an uneasy balance.
This article considers why many television and theatrical
motion pictures targeted primarily at U.S. audiences are not
made in America. It also examines the economic impact
resulting from the flight of such productions. Finally, it
considers possible solutions in an effort to reverse the
trend.

II. The History of ``Runaway Production''

Runaway production is not a new phenomenon. In December
1957, the Hollywood American Federation of Labor (``AFL'')
Film Council, an organization of twenty-eight AFL-CIO unions,
prepared a report entitled ``Hollywood at the Crossroads: An
Economic Study of the Motion Picture Industry.'' This report
addressed runaway production and indicated that prior to
1949, there were an ``insignificant'' number of American-
interest features made abroad. However, the report indicated
a drastic increase in productions shot abroad between 1949
and 1957. At that time four major studios--Columbia Pictures,
Inc. (``Columbia''), Twentieth-Century Fox, Inc. (``Fox''),
Metro-Goldwyn-Mayer (``MGM'') and United Artists, Inc.
(``United Artists'')--produced 314 films. Of these films,
159, or 50.6 percent, were shot outside the United States. It
also revealed runaway films were shot primarily in the United
Kingdom, Italy, Mexico, France and
On December 1, 1961, H. O'Neil Shanks, John Lehners and
Robert Gilbert of the Hollywood AFL Film Council testified
regarding runaway productions before the Education and Labor
Subcommittee on the Impact of Imports and Exports on American
Employment. Shanks explained to the subcommittee: ``Apart
from the fact that thousands of job opportunities for motion
picture technicians, musicians, and players are being
``exported'' to other countries at the expense of American
citizens residing in the State of California, the State of
New York, and in other States because of runaway production
this unfortunate trend . . . threatens to destroy a valuable
national asset in the field of world-wide mass
communications, which is vital to our national interest and
security. If Hollywood is thus permitted to become ``obsolete
as a production center'' and the United States voluntarily
surrenders its position of world leadership in the field of
theatrical motion pictures, the chance to present a more
favorable American image on the movie screens of non-
Communist countries in reply to the cold war attacks of our
Soviet adversaries will be lost forever.''
John ``Jack'' L. Dales, Executive Secretary of the Screen
Actors Guild (``SAG''), and actor Charlton Heston also
testified before this subcommittee. Dales stated: ``We
examined and laid out, without evasion, all the causes [of
runaway production] we knew. Included as impelling foreign
production were foreign financial subsidies, tax avoidance,
lower production costs, popularity of authentic locale,
frozen funds--all complex reasons. We urged Congressional
action in two primary areas: 1) fight subsidy with subsidy.
Use the present 10 percent admissions tax to create a
domestic subsidy; 2) taxes . . . We proposed consideration of
a spread of five or seven years over which tax would be paid
on the average, not on the highest, income for those years.''
Despite these impassioned pleas, runaway production has
continued to grow in importance, scope and visibility. Today
it ranks among the most critical issues confronting the
entertainment industry. The issue received increased
attention in June 1999, when SAG and the Directors Guild of
America (``DGA'') commissioned a Monitor Company report,
``The Economic Impact of U.S. Film and Television Runaway
Production'' (``Monitor Report''), that analyzed the quantity
of motion pictures shot abroad and resulting losses to the
American economy. In January 2001, concerns over runaway
production were addressed in a report prepared by the United
States Department of Commerce. The eighty-eight page document
(``Department of Commerce Report'') was produced at the
request of a bipartisan congressional group. Like the Monitor
Report, the Department of Commerce Report acknowledged the
``flight of U.S. television and cinematic film production to
foreign shores.'' Both reports quantify the nature and depth
of the problem and warn of further proliferation if left
unchecked.
Additionally, the media is bringing the issue of runaway
production to the attention of the general public. Numerous
newspaper articles have focused on the concerns cited in the
Monitor Report.
For example, in The Washington Post, Lorenzo di
Bonaventura, Warner Bros. president of production, explained
the runaway production issue as follows: ``For studios, the
economics of moving production overseas are tempting. The
Matrix cost us 30 percent less than it would have if we shot
in the United States. . . . The rate of exchange is 62 cents
on the dollar. Labor costs, construction materials are all
lower. And they want us more. They are very embracing when we
come to them.''
Di Bonaventura indicated Warner Bros. received $12 million
in tax incentives for filming The Matrix in Australia. This
is a significant savings for a film that cost approximately
$62 million to produce.

III. Causes of Runaway Production

In the Department of Commerce Report, the government
delineated factors leading to runaway film and television
production. These factors have contributed to the
``substantial transformation of what used to be a traditional
and quintessentially American industry into an increasingly
dispersed global industry.''

A. Vertical Integration: Globalization

Vertical integration is defined by the International
Monetary Fund as ``the increasing integration of economics
around the world, particularly through trade and financial
flows.'' The term may also refer to ``the movement of people
(labor) and knowledge (technology) across international
borders.''
Consequently, companies must now be productive and
international in order to profit. Because companies are
generally more interested in profits than in people,
companies are often not loyal to communities in which they
have flourished. Instead, they solely consider the bottom
line in the process of making business decisions.
Columbia is an excellent example of the conversion from a
traditional U.S.-based company to a global enterprise.
Columbia began in 1918 when independent producer Harry Cohn,
his brother Jack and their associate Joe Brandt, started the
company with a $100,000 loan. In 1926, Columbia purchased a
small lot on Gower Street in Hollywood, California, with just
two sound stages and a small office building. In 1929,
Columbia's success began when it produced its first
``talkie'' feature, The Donovan Affair, directed by Frank
Capra, who would become an important asset to Columbia. Capra
went on to produce other box office successes for Columbia
such as You Can't Take It With You and Mr. Smith Goes to
Washington.
In 1966, Columbia faced a takeover attempt by the Banque de
Pan's et de Pays-Bas, owner of twenty percent of Columbia,
and Maurice Clairmont, a well-known corporate raider. The
Communications Act of 1934 prohibited foreign ownership of
more than one-fifth of an American company with broadcast
holdings. The Banque de Pan's could not legally take over
Columbia because one of Columbia's subsidiaries, Screen Gems,
held a number of television
In 1988, Columbia's share of domestic box office receipts
fell to 3.5 percent and Columbia registered a $104 million
loss. In late 1989, Columbia entered into an agreement with
Sony USA, Inc., a subsidiary of Japan's Sony Corporation, for
the purchase of all of Columbia's outstanding stock. This
acquisition apparently did not violate the amended
Communications Act.
Following in Columbia's footsteps, other studios have
globalized through foreign ownership. Universal Studios, Inc.
(``Universal''), previously the Music Corporation of America,
was acquired by the Japanese electronics company Matsushita
in 1991, and four years later was purchased by Seagram, a
Canadian company headquartered in Montreal. In 1985,
Australian media mogul Rupert Murdoch acquired a controlling
interest in Fox, and Time, Inc., a publishing and cable
television giant, acquired Warner Bros. in 1989.
As studios become multinational, their loyalty to the
community or country in which they were born wanes. The
international corporations are no longer concerned with the
ramifications of moving production outside of their community
or country; they are instead concerned only with bottom-line
profits, Columbia exemplifies globalization. Columbia no
longer owns a studio lot, let alone its humble beginnings on
Gower Street. The Studio simply rents office space in a
building in Culver City, California. Not surprisingly, global
corporations think globally, not locally. Shooting abroad is
not only acceptable, but preferable to companies who are not
loyal to any one country.

B. Rising Production and Distribution Costs and Decreasing Profits

By the end of the 1990s, studio executives began to alter
their business methods. Despite aggressive cost-cutting,
layoffs, strategic joint ventures and movement of production
to foreign shores, rising production and distribution costs
have consumed profits over the last decade. Production costs
rose from an average of $26.8 million to $51.5 million.
Distribution costs for new feature films

[[Page E1500]]

more than doubled. In 1990, the average motion picture cost
$11.97 million to distribute, and by 1999, the costs rose to
$24.53 million. At the same time, profit margins dropped. For
example, Disney Studio's profits decreased from 25 percent in
1987 to 19 percent in 1997, and Viacom's profits dropped from
13 percent in 1987 to less than 6.5 percent in 1997.
Additionally, both Time Warner and News Corporation, parent
of Fox, showed declining profits as well.

C. Technological Advances

According to the Department of Commerce Report, ``New
technologies and tools may well be contributing to the
increase in the amount of foreign production of U.S.
entertainment programming.'' Ten years ago, even if a foreign
country had lower labor costs, it would have been
prohibitively expensive to transport equipment and qualified
technicians to produce a quality picture abroad. However, new
technology is defeating that obstacle. Scenes shot on film
must be transferred or scanned into a videotape format; this
process creates what is referred to as dailies. However, many
foreign production centers are unable to instantaneously
produce dailies

D. Government Sweeteners

Canada is extremely aggressive in its application of both
Federal and provincial subsidies to entice production north
of the border: At the federal level, the Canadian government
offers tax credits to compensate for salary and wages,
provides funding for equity investment, and provides working
capital loans. At the provincial level, similar tax credits
are offered, as well as incentives through the waiving of
fees for parking, permits, location, and other local costs.
These enticements equal a sizeable economic benefit.
According to the Monitor Report, ``U.S.-developed productions
located in Canada have been able to realize total savings,
including incentives and other cost reducing characteristics
of producing in Canada, of up to twenty-six percent.'' The
Department of Commerce Report carefully delineates a plethora
of incentives employed by a host of countries. It concludes
the undeniable impact of these programs is to weaken the
market position of the U.S. film-making industry and those
who depend on the industry for employment.

E. Exchange Rates

Because the U.S. dollar is stronger than Canadian,
Australian and U.K. currencies, American producers have more
purchase power when they opt to film abroad. As a result,
producers are tempted to locate where the dollar has the most
value. The Canadian, Australian and U.K. currencies have all
declined by fifteen to twenty-three percent, relative to the
U.S. dollar, since 1990.

IV. The Impact of Runaway Production

A. The Economic Impact

In total, U.S. workers and the government lost $10.3
billion to economic runaways in 1998. According to the
Monitor Report, ``$2.8 billion in direct expenditures were
lost to the United States in 1998 from both theatrical films
and television economic runaways.'' For example, if a
theatrical picture is shot in New York, then carpenters are
employed to make the set, caterers are employed to prepare
and serve food, and costume designers are hired to provide
wardrobe. As the Department of Commerce Report explains,
``Behind the polished, finished film product there are tens
of thousands of technicians, less well-known actors,
assistant directors and unit production managers, artists,
specialists, post-production workers, set movers, extras,
construction workers, and other workers in fields too
numerous to mention.''
This fiscal loss ripples through the economy affecting
peripheral industries. In addition to the direct economic
loss discussed above, the Monitor Report calculated an
additional $5.6 billion lost in indirect expenditures.
Indirect expenditures include real estate, restaurants,
clothing and hotel revenues, which are not realized. In
addition to these private industry losses, the govenment lost
$1.9 billion in taxes to runaway production. As opposed to
the $10.3 billion lost in 1998, the study estimated those
figures will be between $13 and $15 billion in 2001.

B. The U.S. Production Drought

The Monitor Report stated that between 1990 and 1998, U.S.
film production growth fell sharply behind the growth
occurring in the top U.S. runaway production locations of
Canada, Australia and the U.K. It stated that Australia ``is
growing 26.4 percent annually in production of U.S.-developed
feature films, or more than three times the U.S. growth
rate.'' Similarly, ``Canada is growing at 18.2 percent
annually in production of U.S.-developed television projects,
more than double the U.S. rate.'' During the same period,
annual growth rates in the United States were 8.2 percent for
feature films, and 2.6 percent for television.

C. Job Loss

Runaway production also impacts the U.S. labor market. It
is estimated there are 270,000 jobs directly tied to film
production. It is further estimated that 20,000 jobs were
lost in 1998 alone due to runaway production. However, these
statistics do not fully reflect the impact of economic
runaway production on employment. They fail to account for
spin-off employment that accompanies film production. It is
estimated by the Commerce Department that the ripple effect
of secondary and tertiary jobs associated with the industry
might easily double or triple the number of jobs dependent
upon the industry.
Regardless of the understated nature of the economic
impact, the Commerce Department acknowledges that at least
$18 billion in direct and indirect export revenues and $20
billion in economic activity are generated by the industry
annually.

D. Loss of Pension and Health Benefits

Performers and others who work on foreign productions may
lose valuable pension and health benefits. As provided in the
SAG collective bargaining agreements, performers are entitled
to receive pension and health contributions made to the plans
on behalf of performers when they work on productions.
Although SAG does allow for some pension and health
reciprocity with the Canadian performers union, performers
must negotiate this term into their contracts. More often
than not, performers are unable to negotiate this benefit for
work performed in Canada.

E. Cultural Identity

In 1961, Congress was warned that the trend of runaway
production threatened to destroy a valuable ``national
asset'' in the field of worldwide mass communications. As H.
O'Neil Shanks, John Lehners and Robert Gilbert of the
Hollywood AFL Film Council testified in 1961, if

V. Solutions

A. The Film California First Program

California remains a leading force in the industry, and
last year took a legislative step to remedy the problem of
runaway production. The state passed a three-year, $45
million program aimed at reimbursing film costs incurred on
public property. The Film California First (``FCF'') program
is specifically geared toward increasing the state's
competitive edge in attracting and retaining film projects.
To accomplish this goal, the legislation provides various
subsidies to production companies for filming in California,
including offering property leases at below-market rates.
This legislation should serve as a model for other states, as
they too struggle with an issue of increasing economic
importance.

B. Wage-Based Tax Credit

A possible solution could be patterned after a legislative
proposal offered, but never advanced, in the 106th Congress.
Specifically, this proposal called for a wage-based tax
credit for targeted productions and provided: (1) a general
business tax credit that would be a dollar-for-dollar offset
against any federal income tax liability; (2) a credit cap at
twenty-five percent of the first $25,000 in wages and
salaries paid to any employee whose work is in connection
with a film or television program substantially produced in
the United States and (3) availability of credit only to
targeted film and television productions with costs of more
than $500,000 and less than $10 million.

C. Future Solutions

To rectify the problems of runaway productions, legislation
at the local, state and federal levels is paramount. Over the
past thirty years, the film industry has expanded beyond
California to become a major engine of economic growth in
states such as New York, Texas, Florida, Illinois and North
Carolina. To achieve effective legislative remedies, it is
critical to examine the successful programs implemented by
other nations.
Maybe it is the inexorable result of a changing world.
Regardless, the proliferation of foreign subsidies for U.S.
film production, which is occurring at an increasing rate
worldwide, raises troubling questions of fairness and equity.
From a competitive standpoint, it appears as though the deck
is stacked against a class of workers who seek to derive
their livelihood from this industry but find their jobs have
moved overseas. It is understandable that producers will take
the opportunity to film abroad when the reduction in costs is
as much as twenty-five percent. Consequently, the only remedy
for America's workforce is to pass legislation that provides
commensurate benefits in the United States.
It is apparent that a laissez-faire, market-oriented
approach has failed the American worker. Unemployment is
extraordinarily high within the creative community, leading
to seventy percent of SAG's 100,000 plus members earning less
than $ 7,500 annually. This economic hardship is exacerbated
by runaway production. Thus, it is abundantly clear that
legislative remedies attempting to more adequately level the
playing field must be pursued. Amid encouraging signs that a
tax bill of significant consequence is likely to pass
Congress in the coming months, it is imperative that the
creative community take a proactive position to ensure that
the

[[Page E1501]]

tax bill provides incentives for domestic film production. It
must use all resources to cure the concerns presented in the
two reports outlined in this Article. Organizations, such as
SAG, must work with Congress to develop a proposal that is
acceptable in terms of cost and other political
considerations.
While it seems unlikely that there is the political will or
desire to match the incentives offered by many of our
competitors, it is conceivable to the authors that an
effective approach can be designed to substantially close the
gap on cost savings without eliminating them. Thus, the
approach advocated involves identifying the level where cost
savings of filming abroad are minimized so as not to be the
determinative location factor. An appropriate level may be in
the range of ten percent cost savings versus the twenty-six
percent cost savings now common in some Canadian locations.
It is important to note the strategy used to fashion a
remedy is just as important as the relief sought. The
industry should be willing to approach the tax-writing
committee staff with the afore-mentioned concept and work
closely with them in designing a legislative remedy. This
strategy represents a holistic approach to a global problem.
It is important to remember the United States risks losing
its economic advantage in a vital industry which carries with
it enormous economic consequences. As noted in the Department
of Commerce Report:
If the most rapid growth in the most dynamic area of film
production is occurring outside the United States, then
employment, infrastructure, and technical skills will also
grow more rapidly outside the United States, and the country
could lose its competitive edge in important segments of the
film industry.

VI. Conclusion

Politics represents the art of the possible. The approach
advocated in this Article should find a receptive ear in the
halls of Congress if for nothing else than its simplicity.
Timing is crucial. Left unchecked, the only certainty is
continuing runaway production with the attendant economic
costs, lost jobs, and diminished tax revenues at all levels
of government. In a time of waning economic growth and
warning signs of dwindling surpluses and future economic
weakness, including production incentives into any upcoming
tax relief is essential to preserving the U.S. workforce in
the American entertainment industry.

____________________