Building on the marquee value of movies such as "The Descendants" and television shows like "Hawaii Five-0," state lawmakers are discussing whether to enhance tax credits for film and digital media production and offer new incentives to hire local workers.
The incentives could help lure more movies and television shows to Hawaii, which had a record $407 million in production spending in 2010 but could be losing ground as other states and countries offer more generous tax breaks. Production spending in Hawaii dropped to about $180 million last year, a level film industry experts believe is closer to expectations.
The existing production tax credit costs the state about $20 million a year — and more than double that amount in a banner year like 2010 — but has the potential to generate a return in tax revenue and economic growth.
In a session where the theme is economic recovery, expanding the film tax credit may fit as a means of job creation. But lawmakers are also being urged to use the first small surplus after several years of projected budget deficits to replenish the state’s rainy day and hurricane relief funds, stabilize education and social services, and make new investments in technology and watershed protection.
Donne Dawson, acting director of the State Film Office, believes expanding the film tax credit can pay off. She said movie and television productions have the potential to touch almost every economic sector in the islands and complement the state’s tourism promotion.
"We know that, for better or for worse, incentives are the name of the game right now," she said. "So I think that to the extent we can make our incentive program as attractive as possible, it is going to serve the industry well."
Vans Stevenson, senior vice president of state government affairs at the Motion Picture Association of America in Washington, D.C., said production costs are a driving factor when evaluating movie and television projects. He said tax credits can help mitigate financial risk.
"Obviously location is a factor, creative issues are a factor, but cost is paramount in the majority of cases," he said.
The Center on Budget and Policy Priorities, a Washington, D.C., research group, and budget analysts in several states have suggested that the competition for movie and television productions has led to state subsidies that are too generous and do not result in the projected economic return.
FILM TAX CREDITS
State lawmakers could enhance tax incentives to lure more film and digital media projects to Hawaii and to hire local workers on production crews. Here is a look at the options:
FILM TAX CREDIT (HOUSE BILL 2869)
>> Leaves the production tax credit at 15 percent on Oahu and 20 percent on the neighbor islands. Increases the dollar cap on the credit per production to $16 million, up from $8 million. Deletes the 2016 sunset on the tax credit.
>> Provides an additional tax credit of 10 percent on production costs paid to local residents, vendors and suppliers.
>> Creates a tax credit of 50 percent on infrastructure costs of at least $10 million, with a dollar cap on the credit of $25 million per project. Requires that at least 60 percent of workers on the project be local or students during the first two years and 70 percent be local or students in future years. Requires that the tax credit be eventually repaid to the state in full through annual payments.
>> Establishes a film and media special fund, financed — starting in July 2013 — with quarterly state payments equal to 2 percent of the wages and salaries paid to local residents who work on production crews, as well as other fees, grants and private donations. The special fund would be used to operate the state’s film and digital media programs, for grants to filmmakers or film festivals, internships and training, and other projects to stimulate growth.
MEDIA INFRASTRUCTURE TAX CREDIT (HOUSE BILL 1308)
>> Creates a tax credit for media infrastructure projects, such as production studios on Maui and Oahu, with a dollar cap per project.
>> Significantly increases the production tax credit on Oahu and the neighbor islands. Provides an additional credit for special effects and animation costs. Removes the $8 million cap per production.
>> Establishes a wage rebate for a local crew training program.
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In Hawaii, the state’s high labor, consumer and travel costs can diminish the value of tax breaks, so the main selling point remains the physical beauty of the islands.
The Tax Foundation of Hawaii has said taxpayers should be "insulted" that lawmakers can offer tax breaks for film production but no tax relief for residents.
"There is absolutely no rational basis for increasing and continuing these tax credits other than that other states are offering similar tax credits," the foundation told lawmakers. "Then again, those states can’t offer paradise, year-round good weather during which to film. Instead of utilizing back-door subsidies through tax credits, film industry advocates need to promote the beauty that is synonymous with Hawaii."
The state Senate is preparing to vote this week on a bill that would keep the production tax credit at 15 percent on Oahu and 20 percent on the neighbor islands but double the dollar cap on the credit per production to $16 million, up from $8 million. The bill would also repeal the 2016 deadline for the credit to expire.
An additional 10 percent tax credit would be available on production costs paid to local workers, vendors and suppliers. A new 50 percent credit would be offered for infrastructure costs on production facilities of at least $10 million, with a $25 million cap per project. But the infrastructure credit would have to eventually be repaid to the state in full over time.
Many of the provisions in the bill were recommended by NBC Universal Media, including the incentive for local hiring.
Sen. Carol Fukunaga (D, Lower Makiki-Punchbowl), chairwoman of the Senate Economic Development and Technology Committee, said the goal is not just to attract a few big movies or television shows every few years, but to help develop and sustain a film and digital media industry that will provide quality jobs in areas such as special effects, animation, video games and post-production. The bill contains annual reporting requirements that would outline the state’s return on investment and the economic benefits of the tax credits to help ensure accountability.
Rep. Angus McKelvey (D, Olowalu-Kapalua), chairman of the House Economic Revitalization and Business Committee, said the House would consider the bill for conference committee if it clears the Senate.
"When these productions come to town, small businesses, trades, everybody benefits," he said.
A separate bill that reached conference committee last year and is still alive would increase the production tax credit and provide a new infrastructure credit. Relativity Media, a Hollywood entertainment company, has circulated one proposal that would significantly boost the production tax credit on Oahu and the neighbor islands and lift the dollar cap.
A bonus would be offered for production costs that involve special effects or animation. A new infrastructure tax credit on Oahu and the neighbor islands would be available, with a cap per project. Wage rebates would be offered through a local crew training program.
"Ours is about creating infrastructure in this state," said Ryan Kavanaugh, Relativity’s chief executive officer, who has a home on Maui and has talked about building studios on Maui and Oahu if additional tax incentives are approved.
Kavanaugh and his associates have met with Gov. Neil Abercrombie and House and Senate leaders over the past several days, asking that the bill be heard in conference this session. Maui Mayor Alan Arakawa, who has been courted by Relativity about a Maui studio, met with the governor on Thursday.
Abercrombie has urged lawmakers to make the existing film tax credit permanent, citing the success of "The Descendants," which was nominated for an Academy Award for best picture, as an example of Hawaii’s potential as a venue. Blake Oshiro, the governor’s deputy chief of staff, said the governor is open to what the Senate has drafted but would weigh it with other new spending in the state budget and financial plan. He said the governor has made no commitment on Relativity’s proposal.
Hollywood stars such as Cuba Gooding Jr., who testified at the state Capitol, and Bradley Cooper, who appeared in a video, were part of Relativity’s campaign last year. But while the bill reached conference committee, few lawmakers thought it would pass at a time when the state was trying to close a $1.2 billion deficit. This year, the momentum appears to be behind the option favored by NBC Universal.
But a Hollywood ending might again have to wait.
Even supporters have doubts that lawmakers will grant expanded tax credits when public-sector workers are still living with pay cuts and general-excise tax exemptions remain temporarily suspended for contractors and others to help balance the budget.
Dawson said extending the existing film tax credit beyond 2016 and providing additional staff to sustain a film office downsized during the recession may be more achievable this year.
"We have got to be able to provide predictability and stability for the industry," she said. "They have got to be able to plan their production schedules. Not six months in advance or a year in advance. They’ve got to be able to plan years in advance and know that the incentive is still going to be there."
