Justify benefits of film tax breaks

Few imagined that the tax credit helping to underwrite film projects was approved only as a short-term jumpstart for the industry. Tax credits have a tendency to stick around, sometimes for longer than they should.

In this case, though, Hawaii almost certainly will need to maintain its incentive for companies seeking the island setting for their productions.

But the state also needs to know how the tax credit, which will be up for renewal in another year, benefits the state at large and this industry specifically — far more precisely than is known now.

That is the point of the report, “Audit of Hawai‘i’s Motion Picture, Digital Media, and Film Production Income Tax Credit,” in which the state auditor makes it plain that the available evidence doesn’t support the richness of the state’s investment.

That is, after all, what a tax credit is: a redirection of taxpayer revenues toward an interest that benefits Hawaii as a whole. What’s missing is sufficient information to justify this investment. The most recent count cited in the audit shows only 13 out of 20 major projects submitting accounting reports conducted by third-party reviewers; such reports should be mandatory.

The auditor has noted other significant problems that merit resolution in the coming legislative session — well in advance of the sunset of the current law, set for the end of 2018.

Among these is the scope of the film tax credit, which the state Department of Taxation has broadened by including out-of-state expenses as “qualified production costs” eligible for the credit, according to the audit.

“That action is inconsistent with the plain language of the statute and the Legislature’s intent that the incentive would stimulate economic growth in Hawaii,” according to the report, submitted by state Auditor Leslie Kondo.

For its part, the Department of Business, Economic Development and Tourism (DBEDT), disputes this, among other findings.

“When production companies purchase goods and/or services outside of the state, it is usually because the item was unavailable in-state,” DBEDT officials said in a written response to the audit.

However, a clearer nexus between those expenditures outside Hawaii and the benefit to the state must be drawn. Lawmakers should insist on more feedback from the taxation department after they convene in session next month.

In addition, DBEDT said it fulfills requirements under the law for reports including a cost-benefit analysis.

Donne Dawson, state film commissioner, said the perception that companies are abusing the tax-credit opportunity is wrong and that this program is similar to that in 40 other states.

Dawson said in an interview last week that one primary problem with the implementation of the program is staff capacity.

The downtown office of four staffers, with one at the studio facility, struggles to process applications as well as other adminis- trative tasks.

‘The program needs to be accessible,” she said. “What should be taking four to six weeks is taking us four to six months. And that’s not good for business.”

That issue should be discussed as part of an evaluation about the tax credit’s effectiveness. But the principal concern is getting appropriate data for a reasoned evaluation.

DBEDT does concur with the need for mandatory third-party accounting of at least the major projects, generally defined as those incurring expenditures of $1 million or more. That should be implemented immediately, so that the feedback on the program is at least more robust before decisions are made about the law’s reauthorization.

The islands need to remain competitive with other locations as a site for film productions. But having better data would enable the state to demand more in return — the local job opportunities and other benefits that Hawaii plainly deserves.