Amidst the scramble by lawmakers to find new and additional sources of revenue to fill the gaping hole in the general fund budget of more than $850 million, there are some who remain awestruck and bedazzled by proposals to give
Amidst the scramble by lawmakers to find new and additional sources of revenue to fill the gaping hole in the general fund budget of more than $850 million, there are some who remain awestruck and bedazzled by proposals to give even more away in state tax dollars in the form of tax credits for motion pictures and digital media productions.
Under the initial proposals making their way through both houses of the legislature, the state’s current tax incentive for the production of motion pictures, television series, and digital media would be increased from 15 percent to 35 percent in a county with a population of 700,000 or over and from 20 percent to 40 percent in a county with a population of under 700,000. The $8 million cap on the amount of credit that could be claimed for each production would be eliminated and the measures would also exempt accommodations used by cast or crews for more than 30 days from paying the TAT or hotel room tax.
The measures could also expand the application of the credit to include special or visual effects and animation, and media infrastructure projects. There would be new tax credits for a percentage of the qualified special or visual effects and animation production costs and for qualified media infrastructure projects that may include rentals of any transient accommodations for cast and crew, certain equipment costs, bank loan finance fees attributable to a qualified production, and other direct production costs.
So as lawmakers grapple with the $850 million shortfall in the state budget, they need to remember that the perpetuation and expansion of the motion picture tax credits are a drain on the state treasury. It is incredible how lawmakers can bemoan the fact that there are insufficient resources to close the gaping hole in the state budget, be it to eliminate furlough Fridays or the need to tax pensions, yet are willing to throw additional public resources at a subsidy of film productions and media infrastructure as proposed in the bills currently under consideration. Taxpayers should be insulted that lawmakers are eager to provide breaks for film productions but refuse to provide tax relief for residents, many of whom work two or three jobs just to keep a roof over their heads and food on the table.
Advocates for the film tax credits argue that if film productions don’t come to the state, there would be no loss of revenue. Thus, the credits are critical to attract those productions to Hawai‘i.
Unfortunately, that is the same prattle that advocates of the state’s high-tech tax credits made. Like the high-tech promoters, the film production and digital media people need the tax credits because they don’t have the resources to finance their productions.
But the tax credits represent a source of financing, because they can use the credits to sell to investors in order to raise the capital needed to finance the project.
And where does this capital come from? Since these are state tax credits, they are only good for those who have Hawai‘i state tax liability. That means those who would purchase those tax credits are either residents or people who have a business in Hawai‘i. Thus, while the initial investors may have been nonresidents on whom the tax credits are bestowed, the transfer or sale of the credit will more than likely be to those who live or do business in the state. Thus, the credits are not attracting new capital; rather the initial investors are getting an immediate return on their investment by selling off those credits.
So the promoters of the film tax credits threaten to go elsewhere if they don’t get their improved tax credits. But one has to ask if they go elsewhere will they still need the tax credits? If they don’t get the tax credits in Hawai‘i, will they ask the residents of New Jersey or Michigan for the same tax credits? If so, they are out of touch. Every single state, save one or two, is in as much deep trouble as we are financially.
If movie productions are interested in the bottom line and need state assistance, there are other things the state can do to help reduce the cost of productions and the building of film studios. The biggest one is the acquisition of land and the permitting required to build those studios and getting permission to access restricted areas such as conservation districts. Time is money — and accelerating and expediting the permitting process could save them a ton of time and man-hours. If that is added to the existing asset called natural beauty, these promoters may find that they could undertake this project without the tax credits.
Tax credits are lost revenue — revenue that must be made up or government spending must be cut.
• Lowell Kalapa is president of the Tax Foundation of Hawai‘i, a private, nonprofit, non-partisan, educational organization established to research issues confronting governments in the area of public finance, taxation, and public administration. It is supported entirely by private contributions. Visit www.tfhawaii.org for more information.
