Should the Aquaman film production on the Gold Coast get a $22M tax break?

Last month, the Federal Treasurer and Queensland Premier argued over their respective roles in luring the Aquaman film production to the Gold Coast (see news.com.au article). In monetary terms, the Federal Government made the greatest contribution by far, with $22 million in tax breaks offered to the film production. The beneficiaries are the highly profitable US companies DC Comics and Warner Bros, which are the producers of Aquaman.

The tax break the production will receive is called the Location Tax offset, which for Aquaman the Commonwealth has bumped up to 30 percent from the usual 16.5 percent applied to production expenditure within Australia. The Commonwealth will pay the Aquaman producers $22 million, less whatever tax is owed by them for profits booked to the Australian operation.

The Queensland Government has not disclosed any financial contribution, but its media release notes:

“The Palaszczuk Government, through Screen Queensland, has invested an extra $30 million over four years to continue to attract large-scale film and high-end television productions to Queensland to increase jobs and expenditure into the State’s economy.”

So the Queensland Government may have provided a sweetener to attract the production, possibly as a rebate of payroll tax. The production will also benefit from the use of a large sound stage at Village Roadshow Studios on the Gold Coast that, oddly, the Queensland Government covered the bulk of the costs for: $11 million out of a total cost of
$15.5 million (see this media release for details). Sure, it will be used during the Commonwealth Games, but Village Roadshow will derive the bulk of the benefits from the sound stage over its life.

Given all this special assistance to the film industry, we should ask what justifies the industry getting such special treatment. Is it merely because of the glamour of Hollywood, the opportunity for politicians to appear on location or on the red carpet with movie stars? Or is there is a genuine benefit from an economic perspective?

Consider first that the Queensland Premier did make an important point in her attempt to claw back some of the credit from the Federal Treasurer for luring the production, noting in the Queensland Government media release:

“Australia doesn’t have a competitive tax system.”

I suspect the Premier was referring to the competitiveness of our tax system in relation to international film productions specifically, but her point is of broader applicability. Indeed, business groups and the Australian Treasury have been saying Australia’s tax system is internationally uncompetitive for years, and our uncompetitive tax system is the motivation for the Government’s proposed reduction in the company tax rate from 30 to 25 percent.

But why should the film industry, and particularly an international film production where the bulk of the profits will be repatriated overseas, get special treatment? Why not provide broader tax relief?

Let us consider the arguments typically advanced by film industry advocates. First, it is argued the film industry deserves special treatment because it creates jobs, directly and indirectly. Second, it is argued that government support is needed in the early stages to get the industry going, so it can reach a critical mass, an infant industry argument for public support.

The jobs argument is subject to a number of problems. It is typically very expensive for the government to create jobs. In this case, the $22 million tax break amounts to $22,000 to $37,000 for each of the 600 to 1,000 (temporary) jobs estimated to be supported by the production. And the Gold Coast does not appear to be suffering from an unemployment problem. The Queensland Government Statistician’s office estimates an average unemployment rate for the Gold Coast of 5.6 percent compared with the State average of 6.1 percent in the 12 months to November 2016. Other problems with the jobs argument are that, as noted above, the jobs are only temporary, many of the people getting the temporary jobs had other jobs anyway, and, based on the experience with Thor: Ragnarok, many of the jobs are typically not well paid and not as many jobs end up created as expected. CGI means that film productions need fewer people nowadays (see this Gold Coast Bulletin report).

Regarding the infant industry argument, that the industry just needs a hand up in its early days until it becomes self-supporting, we tried that over six decades with the car industry and it did not work, unnecessarily costing taxpayers billions of dollars in the failed attempt. Typically, infant industries do not reach adulthood.

While we have the occasional flurries of meaningful foreign film production expenditure in Australia, these are not long-lasting, as we typically only have a chance of attracting big budget international productions when the exchange rate is low, such as it was in the late 1990s and early 2000s (Chart 1). Even though the Australian dollar has fallen from around parity with the US dollar during the mining boom, currently our exchange rate at 73 US cents is still significantly higher than it was in the late 1990s and early 2000s, when it was in the 50 to 60 US cents range. Hence governments have had to dial up the incentives to attract Hollywood productions such as Aquaman, Thor: Ragnarok and Pirates of the Caribbean 5.

Chart 1: Foreign film production spend in Australia and exchange rate

foreignfilmspend_vs_xrate

Source: Foreign production spend data available from Screen Australia.

It does not make sense for our governments to pick winners and losers, but that is what they are doing when they extend special tax breaks to the film industry. Instead of having special tax breaks for the film industry, we should focus on getting our tax and regulatory policy settings right, so we can attract foreign productions without having to offer special rates for special mates.

My previous posts on the film industry include:

Ragnarok in Brissywood

International film productions such as Thor: Ragnarok unworthy of Qld taxpayer support

Also see my ABC Drum opinion piece:

Taxpayer money wasted chasing film productions

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6 Responses to Should the Aquaman film production on the Gold Coast get a $22M tax break?

  1. Gianna L says:

    Hi Gene,

    Good article!

    One thing for government to consider when ‘choosing’ where to provide stimulus effects is the multiplier effects from the stimulus (where would this leave the arguement for the film industry) or positively impacting future skills development (exposure here to CGI).

    Got to run now.

    G

    On 7 Jan 2017 7:52 AM, “Queensland Economy Watch” wrote:

    > Gene Tunny posted: “Last month, the Federal Treasurer and Queensland > Premier argued over their respective roles in luring the Aquaman film > production to the Gold Coast (see news.com.au article). In monetary > terms, the Federal Government made the greatest contribution by far,” >

    • Gene Tunny says:

      Thanks for the comment, Gianna! Yes, those are additional justifications that are typically advanced by subsidy proponents which I should have addressed and will try to in a future post. I’d note that all industries have linkages with others, and many have the potential to provide high-skilled and interesting jobs. I don’t see why the film industry is so special that it warrants special assistance.

  2. Katrina Drake says:

    I visited Daylesford because it was the setting for “My Brother’s Love”
    I visited Lake Como because it was the setting for Ocean’s Twelve with George Clooney.
    I visited the Trevi Fountain in Rome, because of La Dolce Vita, when Anita Ekberg jumped into the Trevi Fountain with her clothes on, the massive monument has been featured in many films including Roman Holiday, Three Coins in the Fountain and even The Lizzie McGuire Movie.
    I visited the Greek Islands because it was the setting for Ma Mia ! and For Your Eyes Only, and Captain Corelli’s Mandolin. ………..

    Movies are good for encouraging visitors, it brings familiarity.

    Jobs in the film industry are often high-tech, creative, challenging , the type of jobs our young people are looking for. Far better than jobs in the ‘black lung’ coal industry, or the depressing casino industry.

    We really don’t have time to wait until we get the tax and regulatory policy setting right – as that will never happen – and companies don’t take any notice of tax policy anyway, other than to find creative ways to avoid paying it.

    Reminds me of Nauru – investing their resources wealth in the production of a musical about Leonardo Da Vinci’s romance with Mona Lisa. Unfortunately it was a box office flop!

    • Gene Tunny says:

      Hello Katrina, many thanks for the comments. Some very interesting points. Alas the blockbusters we’ve subsidised have not promoted Qld at all as far as I can tell. Brisbane CBD was made to resemble downtown New York for Thor: Ragnarok, Pirates of the Caribbean 5 was obviously not set here, and I doubt Aquaman will be set on the Gold Coast.

      I agree there would be many attractive jobs in the film industry for young people, but there are attractive jobs in all sorts of industries, including in mining. We’re not playing to our strengths and we’re setting ourselves up for disappointment when we subsidise industries that are uncompetitive without government assistance.

      Finally, I must say I’m very envious of all the fantastic places you’ve visited!

  3. edwardshiro says:

    As a foreigner reading this article, I can only say that it gives me a little sadness. A popular proverb in my country says, “No one is a prophet in their land.” What I see here is a suspicious analysis that does not project confidence in its governors and administrators. Achieving a global projection of a location necessarily requires investment and it is the municipal managers who have to attract investors. It is not an infant industry argument. That’s business. It is a reciprocal work that both need: the film industry and the locality that receives them.

    The movie industry is not an infant industry. Much less if we talk about Warner Bros. Pictures, DC Comics and a Superhero film directed by James Wan, who has repeatedly shown his quality of director that ensures a box office success.
    How could it mean a loss for taxpayers in Queensland and specifically Gold Coast?

    I applaud you to say that Queensland has no unemployment problems but an “extra” of money is never bad for anyone. In addition, those who work in the film industry, if they are fit for it and the work is effective, can arise and project their industry. I speak of direct and indirect work: restaurants, hotels, souvenirs, projection of regional culture…

    On a film set you will always need local workers: seamstresses, carpenters, blacksmiths, electricians, drivers, heavy load operators, extras, action doubles…. many people.

    I’m writing this today, because I am interested in this production. I know he will arrive in May on the Gold Coast. I had never heard of Gold Coast. Now I know where it is and I’ve seen online about its beauties. I live on the other side of the planet, in Venezuela. I just hope this production is still successful, and yes, I want it to be a success for their communities. You just have to give some confidence and also demand that they comply with the agreements signed and what your governments have promised.

  4. Jim says:

    While subsidies for the film industry are a dumb way to spend taxpayers’ money, I’d rather see Government largesse wasted on the film industry than say….. more dams where there is no commercial use for the water, stadiums with low utilisation rates, or roads to nowhere (all projects with long financial and environmental liabilities).

    At least the waste of public money on the film industry has a very finite time period.

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