Hawaii Film Blog: Press Massacres Hawaii's Film Tax Credits Again

Wednesday, February 22, 2006

Press Massacres Hawaii's Film Tax Credits Again

Eeek, yuck, blech, humbug! The press never fails to misunderstand and butcher the facts of Hawaii's film tax incentives. The Associated Press's Tara Godvin is the latest offender in her story, "Hawaii offers array of tax credits to families and businesses," which was picked up by the Honolulu Star-Bulletin yesterday.

Godvin describes our Motion Picture and Film Production Income Tax Credit, which refunds 4% of a production company's Hawaii expenditures plus 7.25% of hotel costs, as a credit that "fell out of favor after 2001 brought into being the state's credit to encourage high-tech business investment in the state, which allows companies to claim 100 percent of qualifying costs, with a cap of $2 million. That credit caused a bit of a scandal when it was revealed that the surfing movie 'Blue Crush,' which had a budget of $41 million, managed to claim at least $18 million in tax rebates."

How is this wrong? Let me count the ways:

The 4% Motion Picture and Film Production Income Tax Credit did not fall out of favor at all. Current law allows production companies to claim this credit, plus allows their investors to claim the Act 221 High Technology Business Investment Tax Credit. In other words, provided that production companies fulfill the respective eligiblity criteria set forth by each of the credits, they are allowed to "double dip" and claim both credits. Note that the 4% credit gets to be claimed directly by the production company, but the Act 221 investment tax credit can only be claimed by the company's investors. And believe me, companies and their investors that can claim both, do claim both. So no fallin' out of favor here.
The Act 221 high-tech business investment tax credit does not allow companies to claim 100% of qualifying costs. As I mentioned above, the tax credit allows a company's investors (which may be individuals, partnerships, companies, or corporations) who have Hawaii state income tax liability to claim credits equal to 100% of their investment in the company.
The $2 million cap on Act 221 credits does not apply to the company. This cap applies to each of the company's investors per year of investment. A company may have 100 investors, investing $2 million each per year, with a total investment of $200 million per year. Each of these investors is entitled to Act 221 credits of $2 million each year (distributed to them over 5 years), with total aggregate credits due equal to $200 million to all 100 investors.
Yes, "Blue Crush" did cause controversy over Act 221, but not for the reasons stated. Let's talk hypothetical here, because I can't be sure those figures Godvin quoted are correct. So, assuming the production spent $41 million in Hawaii, it would be perfectly legitimate for its investors to claim $18 million in tax credits under Act 221. After all, the credit equals 100% of the investment. So, technically, if "Blue Crush" were able to find 20 local investors to contribute $2 million each, and one investor to put up $1 million, these investors could claim back their individual investments, at an aggregate of $41 million. What was controversial about "Blue Crush" (one of several things, actually, which y'all can do your own research to dig up) was that certain local investors were allegedly getting back more than 100% of their own personal investment. How did this happen? Well, these certain local investors were making deals with "Blue Crush" in which they asked for more credits allocated back to them in exchange for their investment in the film. For example, an investor may have said to "Blue Crush": "I will put up $1 million of my own money in your film if you allocate back $5 million in credits to me." This is known as the "multiple effect," which gives investors back more than what they invested out of their own pockets--in this example, the investor got back a multiple of 5x. Because "Blue Crush"'s parent company is a California-based studio with no Hawaii income tax liability, it earned more credits than it could actually use, so it was free to allocate them to people who did have Hawaii income tax liability. This "multiple" effect was corrected in 2004 and is now policed much more vigorously by the Tax Department.