Among the tourist hordes on the "walk of fame" last week, you could feel Hollywood casting its spell. They genuflected at the names of actors and film-makers embedded in pink stars in the pavement. Gloria Swanson. John Wayne. Will Smith. Francis Ford Coppola. Quentin Tarantino. Generations of glamour and talent, ringed in brass and close enough to touch.

Open-air vans and double-decker buses packed with camera-toting passengers swayed past palm trees and the Chinese Theatre en route to celebrity home tours – which are in truth celebrity hedge tours, because you seldom glimpse the mansions behind the shrubbery. No matter, the tours are extremely popular: there are now about 40 operators, up from just a handful a few years ago.

With an azure sky and balmy sunshine, the only way to detect autumn was in the billboards for Captain Phillips, 12 Years a Slave and Gravity: serious fodder, after summer bubblegum, for Oscar season. After a record-breaking summer box office, and critical acclaim for best picture contenders, how apt that the famous 45ft letters on Mount Lee have been stripped, smeared with primer and repainted with 255 gallons of high-reflective white paint. Hollywood, quite literally, gleaming.

Appearances deceive. Los Angeles is haemorrhaging film production. Feature films and TV dramas are fleeing California. Other US states, and other countries, are using aggressive tax breaks to siphon off and claim their own bit of La-la-land, turning the world's entertainment capital into a cinematic husk.

"The tourists still come but what they're looking at is the past. It's an illusion," said Michele Burke, a two-time Oscar-winning makeup artist. "The big films are not being made here. Everything has changed."

The exodus has been given a name: runaway production. Adrian McDonald, a research analyst at FilmLA, a non-profit organisation that arranges filming permits, called the flight "staggering". Of the 50 top-grossing movies this year, just four were filmed in California. In 1996, 20 of the top 50 were. On-location movie production in LA has plummeted 60% in 15 years. Not even Battle Los Angeles, an alien invasion romp, was filmed here.

Recent releases confirm the trend. Iron Man 3, shot in North Carolina; The Lone Ranger, New Mexico; The Great Gatsby, Australia; Gravity, England. England will also host Disney's reboot of the Star Wars franchise. Vancouver and Hawaii hosted Warner Bros/Legendary's coming Godzilla blockbuster.

Even worse for local actors, musicians and technicians, TV dramas, which generate steadier work than films, are now bypassing Hollywood. Breaking Bad was due to be set and shot in Riverside, outside LA, before being lured to New Mexico. Only two of last autumn's 23 new dramas were shot in LA County. In 2010, half of TV dramas were shot here. In 2005, the proportion was 80%.

The city abounds with abandoned sound stages. LA has retained half-hour comedy and reality shows but they provide lower-paid, scantier work. A California Film Commission report bewailed the industry's "pronounced erosion". LA's new mayor, Eric Garcetti, has declared the phenomenon a "civic emergency". In a statement to the Observer, he added: "Entertainment is LA's signature industry, and we can't afford to lose it. It's about more than just Hollywood actors and stars – it's an industry of over 500,000 good-paying, middle-class jobs like electricians, carpenters and caterers, and I'm committed to doing everything I can to keep filming here in LA."

Garcetti says California must offer better tax breaks and credits to compete with rivals, including Canada and the UK. For a big production these inducements can mean tens of millions of dollars. Disney's Iron Man 3, which has grossed more than $1bn, paid no tax to its host, North Carolina, because it was deemed a "temporary business entity".

Legislators in California's state capital, Sacramento, including governor Jerry Brown, have rejected Hollywood's pleas. They say the state already grants about $100m of annual film credits, while schools are underfunded. Many think the studios have little interest in restoring LA's glory and prefer to play rival locations against each other to extract greater tax concessions.

The mayor has appointed Tom Sherak, a former president of the Academy of Motion Picture Arts and Sciences, to head a new entertainment industry and production office. Sherak said he would fight to bring back jobs. "We have all the infrastructure here. We have heat, snow, beaches, mountains and studio back lots that look like New York." If studios tried moving their headquarters out of LA he would move his "Bolshevik army to the border" to stop them, he vowed.

There is a Potemkin village feel where studio executives fill shiny offices, behind which languish empty or underused lots. Some, such as Universal Studios, have converted lots into theme parks, with film-inspired rides.

It is not too late to revive the industry, said Sherak. "It's never too late. Hollywood is not dead. If there's one thing we know how to do out here it's make movies. No one can take away our past."

That past includes Nathanael West's 1939 novel The Day of the Locust, where doomed souls struggle to make it in Hollywood. The unemployed technicians, builders and caterers besieging his office for help would not share the same fate as the novel's characters, said Sherak. "I would have to wipe away my tears if it were true. That's not my vision of Los Angeles. I want this to be the place where that girl from Kansas comes to be the next Julia Roberts."

Struggling actors console themselves with the story of how Brad Pitt dressed as a giant chicken for the restaurant chain El Pollo Loco before his breakthrough role in Thelma & Louise. Those who wait tables inject drama into menu descriptions if they suspect diners are producers or casting agents.

All sectors are battling, said Keith McNutt, western region director of charity the Actors Fund. "People are scared. You see people with long-established careers struggling to make ends meet. You see income levels dropping by a third, a half, two-thirds."

Colleagues are losing houses and marriages, said André Bustanoby, a visual effects veteran with MFX. "It's the rule of the wild and it's going to get uglier. We struggle with it every day. It sickens me."

Burke said a good gig invariably meant a stint outside LA. "If you want to see a friend the first question you ask is are you in town." Outside jobs were dwindling because crews from Shanghai to Baton Rouge had learned from visiting Hollywood masters. "We've trained them so they don't need us." Many colleagues had permanently left LA. "You no longer need to be here."

Varèse Sarabande, the world's largest producer of film scores, recorded just 20 scores in LA last year, compared with more than 100 five years ago. The loss to LA is largely Britain's gain. The lure is not just lower tax but a willingness to forfeit secondary market residuals on future video sales and broadcasts. "In London, you have a buyout option, select your rate and the recording is yours. There are no further tariffs. In LA you have a never-ending [payment] stream," said Robert Townson, the company's vice-president.

Hollywood's hollowing remains largely invisible to outsiders. When LA company Rhythm & Hues won the best visual effects Oscar for Life of Pi, few knew that it had already filed for bankruptcy. Outside the ceremony hundreds of visual-effects artists protested, but they were kept away from the red carpet. To viewers at home Tinseltown, as always, shimmered.