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First One Bad Idea, Then Another

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By Lowell L. Kalapa

The governor recently approved a major tax credit for the motion picture and film industry that will provide these productions with a subsidy equal to 15% or 20% of their production costs depending on whether the production takes place in Honolulu or on the Neighbor Islands.

The administration had come up with a different approach to supporting the film and television production industry which would have allowed investors in high technology performing arts businesses to “redeem” their high technology investment tax credits by turning them back to the high technology performing arts business which then could transfer the credits back to the department of taxation for 20% of the value of the credits. 

The department of business, economic development, and tourism testified that since it was often difficult to attract investors in film productions, many producers put up the money themselves and qualified for the high technology investment tax credits. Since they could not use the credits having no state tax liability, they were often sold – when a buyer could be found – to taxpayers who did have state income tax liability for often pennies on the dollar. The purchaser then could redeem the credits for the full value.

Thus, the administration introduced a bill that would make it “easier” for these film producers to redeem their credits and still get more than they would have selling those credits on the open market. The department also reasoned that by allowing this swapping of credits to be done with the department, the state would be saving 80% of what would have otherwise been redeemed by a purchaser of those credits. So not only was the administration’s proposal one to attract film and television productions to Hawaii, but it was also a proposal to reduce the hit the state would have taken if the high technology credits were redeemed at full value.

In other words, it was a bad proposal to try and mitigate yet another bad law. But advocates of the film industry had their own proposal that had been floating around for several sessions.

Earlier versions of the industry proposal would have established a credit equal to a certain percentage of the production’s payroll. Somehow it seemed lawmakers couldn’t or wouldn’t buy into the idea of subsidizing someone’s payroll, so the measure always ended up on the cutting room floor. This year advocates took a cue from some mainland states where tax credits are offered to film and television producers based on production costs. The application was also expanded to include any type of cinematic production that involved the recording of the production on digital media and included the production of commercials as well as films that are produced locally.

In the middle of the session, the department of business, economic development, and tourism jumped on the bandwagon forsaking their own proposal because they saw the 15%-20% of production costs as a cost savings to the state because they believed that this would be much less than the high technology investment tax credit that could have been claimed for 100% of the production cost.

And while most of the rhetoric supporting the measure was about competing with other states for these types of productions, the legislation that was submitted is so broad that the credits are made available to productions that are already made here.

For example, commercials that extol the virtues of a certain taxi company or a tire company already produced in the state would qualify for the credit. The only criteria that would have to be met is the minimum cost of $200,000 would have to be spent and that the amount of the credit, per production, could not exceed $8 million. While the measure does have a prohibition against claiming the credit if the high technology credit is claimed for the same investment, tracking that likelihood would be difficult as the high technology tax credit is focused on the investor while the film production credit is focused on the producer. This assumption may be because up until now they have been one and the same.

What should distress all taxpayers is that although the advocates of the credit argue that the credits will attract new productions and compete with other states in attracting those productions, the credit will also be available to businesses that are already here in Hawaii. Taxpayers who don’t get any kind of tax break will end up subsidizing those who will be able to claim this credit even though they are next-door neighbors.

Finally, one has to ask what is the contribution to Hawaii when that film or television series makes huge profits? All Hawaii taxpayers will see is a pocketbook that is a little bit lighter.

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