Increases the existing 4% tax credit on Hawaii production expenditures up to 15% for productions on Oahu and 20% for productions on the Neighbor Islands. Expands the definition of qualified productions to include commercials and digital media productions. Prohibits qualification for both the production expenditure tax credit and the investment tax credit, in a given year. Sets a minimum Hawaii production spending requirement of $200,000 for productions to qualify for the credit. Caps claims at $7 million per year per production.

A BILL FOR AN ACT

SECTION 1. This Act seeks to expand the reach and amount of Hawaii's current Motion picture and film production income tax credit to spur more film, television, digital media, and commercial productions in the State, with the ultimate goal of building a sustainable, self-sufficient local film industry. Productions have become, in essence, fertile training grounds for local workers to develop and hone their skills. By increasing the number of productions in Hawaii, the State will be able to grow its local pool of technically skilled and creative workers. Local companies such as those that specialize in editing, visual effects, and digital animation, as well as production equipment and vehicles, also stand to gain as offshore production companies are encouraged by the tax credit to contract with them.

A strong base of human resources--including union craftspeople, actors, editors, photographers, cinematographers, visual effects artists, interactive game designers, software developers, sound designers, computer graphics artists, digital animators, and would-be producers, writers, and directors—-is the seed in growing a sustainable, self-sufficient film industry. The current estimated level of full-time employment in the local film industry is 4,000. This is expected to quadruple to 16,000 if annual production expenditures grow from the current $100,000,000 level to a target $300,000,000 level.

The State would also reap the following benefits: higher tax revenues from increased production spending and income taxes, a decrease in the number of productions taking the Act 215 investment tax credit, the ability to compete with a growing list of regions trying to attract productions, and the promotion of tourism.

Having more productions take place in Hawaii would bring more direct tax revenue to the State. Currently, approximately $13,000,000 in direct tax revenues are generated by the $100,000,000 per year spent on production. If annual production expenditures increased to $300,000,000, the State would gain an estimated $39,000,000 in direct tax revenues.

Incenting productions to choose a more attractive and easy-to-claim production expenditure tax credit over the complex and cumbersome Act 215 (Session Laws of Hawaii, 2004) investment tax credit would refocus the latter toward more appropriate business development. It would also provide administrative relief to the department of taxation because of the relative simplicity of claiming the production expenditure credit versus the investment credit.

The legislature finds that there has been a dramatic increase in the number of jurisdictions passing legislation to attract film productions through tax credits and other financial incentives. In the past six months alone, New York, Pennsylvania, and South Carolina have passed legislation establishing production expenditure tax credits. These states join a substantial list of other regions that already have production expenditure tax credits in place, such as Florida, Illinois, Louisiana, Missouri, New Mexico, Oklahoma, Canada, and Australia. Recognizing the significant economic impact and benefit to the local workforce generated by such incentives, these states offer tax credits and wage rebates equal to ten to fifty per cent of production expenditures.

One successful example of such an incentive is New Mexico's fifteen per cent production expenditure tax credit and fifty per cent wage reimbursement program. Since the credit took effect in 2003, there has been nearly a ten-fold increase in the number of productions as well as the level of production expenditure in the state (from one film spending $8,800,000 to ten films spending $79,100,000). In fact, Hawaii lost Adam Sandler's upcoming "The Longest Yard" to New Mexico because of its inability to compete on incentives. In Santa Fe, where the bulk of the shooting took place, the 450 crew members rented 200 cars and 300 hotel rooms for ninety days, and frequented local stores and restaurants. More importantly, the production created jobs and training for local New Mexican film workers.

Attracting more productions to the State also brings significant benefits to tourism. Production companies utilize an existing visitor industry infrastructure to support and run their productions by booking hotel rooms, renting cars, and purchasing airfare. Cast and crew members brought over from the mainland United States are ideal tourists in that they stay long and spend big. They shop at local stores, dine at local restaurants, visit local attractions, and often bring their families. Their stays in Hawaii are also not subject to the fluctuations of the global political climate, as evidenced by the post-9/11 period when empty hotel rooms were filled by significant numbers of production personnel.

The State also gains exposure and "free" advertising each time a production featuring Hawaii or Hawaiian scenery is broadcast or shown. As an example, it costs $360,000 to buy one minute of advertising airtime during ABC's "Lost," and $218,000 during Fox's "North Shore." If we consider ten minutes of each show qualifiable as positive "promotional" airtime for Hawaii, then the State receives $3,600,000 in "free" advertising from "Lost" and $2,180,000 from "North Shore" each week. In the same way that "Miami Vice" drew a substantial number of tourists to Miami, films and television shows that showcase Hawaii have the potential to increase Hawaiian tourism.

SECTION 2. Section 235-17, Hawaii Revised Statutes, is amended to read as follows:

"§235-17 Motion picture and [film] television production[;] expenditure income tax credit. (a) There shall be allowed to each qualified taxpayer subject to the taxes imposed by this chapter, an income tax credit which shall be deductible from the qualified taxpayer's net income tax liability, if any, imposed by this chapter for the taxable year in which the credit is properly claimed. The amount of the credit shall be up to [four] fifteen per cent of the qualified production costs incurred in any county of the State with a population over seven hundred thousand in the production of motion [picture or] pictures, television [films.] projects, digital media projects, or commercials; or up to twenty per cent of the qualified production costs incurred in any county of the State with a population of seven hundred thousand or less in the production of motion pictures, television projects, digital media projects, or commercials. A production occurring in more than one county may prorate its expenditures based on the amounts spent in each county, if the population bases differ enough to change the percentage of tax credit due. The director of taxation shall specify by rule a schedule of allowable tax credits as well as eligibility criteria based on the principle that greater tax credits shall be allowed for greater benefits to the state economy.

In the case of a partnership, S corporation, estate, or trust, the tax credit allowable is for qualified production costs incurred by the entity for the taxable year. The cost upon which the tax credit is computed shall be determined at the entity level. Distribution and share of credit shall be determined by rule.

If a deduction is taken under section 179 (with respect to election to expense depreciable business assets) of the Internal Revenue Code of 1986, as amended, no tax credit shall be allowed for those costs for which the deduction is taken.

The basis for eligible property for depreciation of accelerated cost recovery system purposes for state income taxes shall be reduced by the amount of credit allowable and claimed.

[(b) There shall be allowed to each taxpayer subject to the taxes imposed by this chapter, an income tax credit which shall be deductible from the taxpayer's net income tax liability, if any, imposed by this chapter for the taxable year in which the credit is properly claimed. The amount of the credit shall be up to 7.25 per cent effective January 1, 1999, of the costs incurred in the State in the production of motion picture or television films for actual expenditures for transient accommodations. The director of taxation shall specify by rule a schedule of allowable tax credits based on the principle that greater tax credits shall be allowed for greater benefits to the state economy.

In the case of a partnership, S corporation, estate, or trust, the tax credit allowable is for production costs incurred by the entity for the taxable year. The cost upon which the tax credit is computed shall be determined at the entity level.

(c)] (b) The credit allowed under this section shall be claimed against the net income tax liability for the taxable year. For the purpose of this section, "net income tax liability" means net income tax liability reduced by all other credits allowed under this chapter.

[(d)] (c) If the tax credit under this section exceeds the qualified taxpayer's income tax liability, the excess of credits over liability shall be refunded to the qualified taxpayer; provided that no refunds or payment on account of the tax credits allowed by this section shall be made for amounts less than $1. All claims, including any amended claims, for tax credits under this section shall be filed on or before the end of the twelfth month following the close of the taxable year for which the credit may be claimed. Failure to comply with the foregoing provision shall constitute a waiver of the right to claim the credit.

(d) To qualify for this tax credit, a motion picture, television, digital media, or commercial production must have qualified production expenditures totaling at least $200,000 and must satisfy certain eligibility requirements that shall be specified by the department of taxation in consultation with the department of business, economic development, and tourism. The director of taxation may adopt rules as necessary to effectuate the purpose of this section pursuant to chapter 91.

(e) In a given tax year, no production that has received financing by virtue of investments covered in section 235-110.9 is eligible for credits under this section in that same tax year.

(f) To receive the credit, productions must first pre-qualify for the credit by registering with the Hawaii film office during the development or pre-production stage. Failure to comply with the foregoing provision shall constitute a waiver of the right to claim the credit.

[(e)] (g) The director of taxation shall prepare forms as may be necessary to claim a credit under this section. The director may also require the taxpayer to furnish information to ascertain the validity of the claim for credit made under this section and may adopt rules necessary to effectuate the purposes of this section pursuant to chapter 91.

(h) Every qualified taxpayer, no later than March 31 of each year in which qualified production costs were expended in the previous taxable year, shall submit a written, sworn statement to the department of business, economic development, and tourism, identifying:

(i) The department of business, economic development, and tourism, shall:

claiming the credits in subsection (a);

Upon each determination, the department of business, economic development, and tourism shall issue a letter to the taxpayer specifying the qualifying costs or expenditure amounts, and the credit amount qualified for each taxable year. The qualified taxpayer shall file the letter with the taxpayer's tax return with the department of taxation. Notwithstanding the department of business, economic development, and tourism's authority under this section, the director of taxation may audit and adjust the tax credit amount to conform to the facts.

(j) Total claims per qualified production shall not exceed $7,000,000.

(k) For the purposes of this section:

"Commercials" means advertising messages that are created by media, including but not limited to film, tape, or digital means for dissemination by conventional broadcast channels, or theatrical distribution and not via the internet. Music videos qualify as commercials. A series of advertising messages would qualify if all parts are produced at the same time over the course of six weeks and comply with subsections (d), (e), and (f).

"Digital media production" means activities directly related to the creation of cinematic imagery and content whether factual or fictional, documentary or dramatic, designed as an entertainment product for mass consumption, utilizing digital or optical cameras and computers, to be delivered via film, videotape, audiotape, digital or optical media, and other delivery systems (not including print media and not including digital media production for the creation of websites), including scripting, casting, set design and construction, shooting, sound recording, editing, and other activities based on standard industry practice.

"Post-production" means services for film, video, or digital media that includes, but is not limited to, editing, film and video transfers, duplication, transcoding, dubbing, subtitling, credits, close captioning, audio production, special effects (visual and sound), graphics, and animation.

"Production" means activities directly related to the creation of visual imagery and content to be delivered via film, videotape, digital media, or printed media. Such activities include, but are not limited to scripting, casting, set design and construction, videography, photography, sound recording, interactive game design, and post-production.

"Qualified production costs" means the costs incurred by a qualified taxpayer in the production of motion pictures, television projects, digital media projects, or commercials within a county of the State in the taxable year for which the credit is being claimed, provided that the production complies with subsections (d), (e), and (f).

Costs eligible for consideration as "qualified production costs" include:

"Qualified taxpayer" means a taxpayer who has complied with subsections (e), (f), and (h), and has incurred qualified production costs, provided that the production complies with subsections (d), (e), and (f)."

SECTION 3. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 4. This Act shall take effect on July 1, 2005, and shall not apply to taxable years beginning after December 31, 2008.