Hawaii lawmakers have written several different scripts this year to dramatically alter the state’s ever-changing film industry tax credit program, and one controversial draft is still pending at the Legislature.

Some of this year’s proposed legislation intended to increase the annual subsidy available to makers of movies, TV shows, commercials and other film and television industry productions beyond the current $50 million, after a move several years ago to rein in escalating rebate payments.

Another measure sought to establish a new tax credit for building certain media production facilities, including film studios.

And one bill aimed to have the Hawaii State Film Office audited and abolished, with all its functions, including tax credit program support, transferred to a new commission.

All the bills that set out to do these things stalled in February or March and cannot be revived this year.

Yet various elements from some of the stalled bills — as well as other ideas to overhaul the film industry tax credit program — were recently inserted into a loosely related bill previously wholly focused on establishing a wage rebate program for small, local independent film and TV productions.

The late change-up for House Bill 1373 is being criticized by some observers as unfair to the public and perhaps unconstitutional.

Film industry stakeholders also have major qualms about the bill, which received all its tax credit change language after the last public hearing on the measure held April 5 by two Senate committees.

“This amounts to bad legislation,” said Tom Yamachika, president of the Tax Foundation of Hawaii, a nonprofit advertising the motto “Good Government Depends on an Informed Public.”

HB 1373 would increase the tax rebate program’s annual payout cap for a single year to $75 million next year from $50 million in order to pay a backlog of unpaid refunds.

The bill also would impose new qualifying criteria for credits, close a window through which the state accrues future obligations to pay subsidies that top $50 million in a single year, and create a $25 million annual tax credit available through 2032 for building film studios and certain other media production facilities.

If enacted into law with film tax credit program changes, HB 1373 would be the sixth time the Legislature has significantly modified the program over the last two decades, and the fourth time in seven years.

However, the new tax rebate provisions in the bill face opposition on several fronts.

‘Way over the line’

Yamachika said it’s obvious that all the tax provisions added to HB 1373 don’t materially relate to the bill’s “workforce development” title covering the bill’s original intent to provide a wage rebate for small independent productions that find it hard to benefit from the existing tax credit program.

“You can’t shove unrelated stuff into a bill outside of its title,” he said.

Hawaii’s Constitution states that no bill shall become law unless it passes three readings in each house of the Legislature on separate days. Two years ago, the Hawaii Supreme Court ruled in a 3-2 decision that this reading requirement begins anew “after a non-­germane amendment changes the purpose of a bill so that it is no longer related to the original bill as introduced.”

Sen. Donovan Dela Cruz, a proponent of the current version of HB 1373, said the bill satisfies this standard because tax credit incentives help develop the film industry workforce along with the bill’s original material that remains.

Dela Cruz (D, Mililani-­Wahiawa-Whitmore Village) also said there was public debate on elements added to HB 1373 during hearings on other bills.

All the tax credit provisions were added to HB 1373 by the Senate Ways and Means Committee chaired by Dela Cruz, and the Senate Committee on Energy, Economic Development and Tourism chaired by Sen. Lynn DeCoite.

DeCoite also introduced further amendments to HB 1373 on the floor of the Senate on April 11 just before the full Senate passed the bill on a 21-1 vote.

DeCoite (D, East and Upcountry Maui-Molokai-­Lanai) declined to discuss the maneuvers in a requested interview. But she said during the April 5 hearing that she proposed the changes after careful and meaningful discussion with Dela Cruz and in consultation with the state Department of Taxation and the state Department of Business, Economic Development and Tourism. She also said during the hearing that people had previously shared testimony on what can move the film industry forward in Hawaii.

DBEDT, which includes a division that houses the State Film Office and supports increasing tax credits for the industry, has privately raised objections to the bill since the tax credit amendments were added.

In a public statement Friday, the agency said it is actively engaged with the Senate and House of Representatives to gain agreement on tax credit program provisions in the bill.

One provision would restrict credits from being claimed on wages for employees who are not Hawaii taxpayers. Yamachika said that can’t be done under the U.S. Constitution’s commerce clause.

“That’s just way over the line,” he said.

Another provision would prevent credits from being claimed on any salary over $1 million for a single person. The industry fears that productions with highly paid stars will seek other places to film if this provision becomes law.

Other provisions would add reporting and audit conditions, change the size of credits depending on whether work is being done in an enterprise zone, and equalize the credit between counties.

Currently, the rebate on qualified expenses is 22% on Oahu and 27% on the neighbor islands.

It’s unclear whether House leaders would be willing to negotiate with Senate counterparts to agree on a mutually acceptable version of the bill, which is needed for HB 1373 to become law.

It is clear, however, that lawmakers have a long history of wanting to alter the tax credit program, which has been praised for diversifying the economy by helping attract more film productions, but is also criticized as a waste of taxpayer revenue subsidizing an industry that would exist here without tax credits.

Take 1, 2, 3 …

Hawaii is one of 32 states, three U.S. territories and at least 60 countries offering film tax credits, according to a 2021 University of Hawaii Economic Research Organization analysis.

An initial version of Hawaii’s program started in 1997 offering rebates of 4% on general excise tax and 6% on transient accommodations tax expenditures. A year later, the TAT rebate was increased to 7.25%.

In 2006, an overhaul was made to offer rebates on a wide range of industry spending taxed in the state. This rebate was 15% on Oahu and 20% in other counties, with a maximum $8 million per production and a 2016 program sunset to stimulate the industry for a decade.

To qualify, a production had to spend at least $200,000 on qualified expenses including equipment, services, cast and crew wages, post-production work such as editing, airfare to or from Hawaii, shipping and insurance.

With the sunset three years away, lawmakers in 2013, under industry lobbying, hiked credits to 20% on Oahu and 25% on the neighbor islands, raised the per-production rebate to $15 million and delayed a sunset to 2019.

The Tax Foundation at the time called the program, which cost the state $32 million in 2013, a “drain on the state treasury” and said no rational basis existed for increasing and extending credits other than to keep pace with escalating incentives elsewhere.

As the program’s cost to the state was on its way to $62 million in 2017, the Legislature moved to rein it in by establishing a $35 million annual payout limit. However, this cap was to take effect in 2019 and still obligated the state to pay all qualified credit claims in years when the annual payout limit wasn’t reached or after the program’s sunset, which got pushed back further to 2026.

The $35 million payout cap, however, never took effect as scheduled in 2019. Instead, lawmakers that year raised the limit to $50 million while mandating that new credit claims over the annual payout limit would not be subject to future payment after 2025.

Then last year, rebates got increased to 22% on Oahu and 27% on the neighbor islands while the per-production cap grew to $17 million and the sunset extended to 2033.

Assessing impact

State Department of Taxation data suggests that the annual payout caps depressed film industry work in Hawaii, as payouts dropped from $80 million in 2018 to $39 million in 2019 and $42 million in 2020.

Yet in 2021, claims totaled $66 million and are estimated to be $79 million in 2022, according to DBEDT data.

Ongoing or recent productions have included NBC’s “Magnum P.I.,” “Doogie Kamealoha, M.D.” on Disney+, CBS’s “NCIS: Hawai‘i” and HBO’s Emmy Award-winning series “The White Lotus.”

Christopher P. Lee, founder and director of the Academy for Creative Media at UH, said in written testimony on a bill introduced this year to raise the annual payout cap to $75 million, Senate Bill 1495, that the program has been a success and a payout increase would be good.

“A stable, reliable credit is essential to continuing the growth of this vital diversification of (the) state’s economy.

Walea Constantinau, film commissioner for the City and County of Honolulu, also endorsed a $75 million annual payout ceiling in written testimony on another bill, HB 932, that proposed changing the existing limit before it stalled like SB 1495.

“The credit is the fuel that drives the engine that powers the current and future development of Hawaii’s film industry,” she said. “The current cap creates a ceiling that is hindering the job growth and infrastructure development.”

UHERO in its 2021 analysis recommended increasing the annual payout to $75 million, but also questioned whether inflation-adjusted industry spending in Hawaii, which more than doubled from $165 million in 2007 to $356 million in 2019, can continue expanding for another decade and contribute measurably to more economic diversification.

The analysis by UH economists Sumner La Croix and James Mak recommended ending the tax credit program in 2030, saying the main reason productions film in Hawaii is access to the state’s natural and cultural capital.

The two economists also suggested that DBEDT conduct a more rigorous analysis of the impact of the film tax credit program.

Another local economist, Paul Brewbaker of TZ Economics, responded to the UHERO report with encouragement for measuring such impact and questioned the cost-benefit of tax credits for particular industries.

Brewbaker, in his response, noted the state doesn’t offer plate lunch makers a 20% spending rebate because they help diversify the economy, and that the makers of “Hawaii Five-0” were not likely going to make the TV show in Georgia.

“Enough winging it,” Brewbaker said.

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Hawaii film industry tax rebates

2013: $32 million

2014: $34 million

2015: $40 million

2016: $32 million

2017: $62 million

2018: $80 million

2019: $39 million

2020: $42 million

2021: $66 million*

2022: $79 million**

*claims

**estimated claims

Source: Department of Taxation and Department of Business, Economic Development and Tourism