Production Credit Hijinx

by Tom Yamachika, President, Tax Foundation Hawaii

For a long time, Hawaii has had income tax incentives to encourage television, movies, and other productions to work their magic here in Hawaii.  The production credit was enacted in 1988, at which time it was 4% of regular production costs plus 6% of transient accommodations, mirroring the GET and TAT rates at the time.  The credit was gradually sweetened over the years and was boosted to 22% in Honolulu and 27% in any other county just last year (Act 217, SLH 2022).

This session, there is a bill threatening to make major changes to the tax credit scheme, House Bill 1373.  By the time this article goes to press, the Legislature will have finally decided what to do about this bill.  But before then, we can describe what is happening with this bill, hopefully to prevent the same kind of hijinks from happening again.

HB 1373, as introduced, proposed a workforce development incentive as an alternative to the production credit because the latter is complicated, expensive, and time-consuming.  As a practical matter it is tough to deal with unless your production is backed by a major studio.  Thus, the incentive was proposed primarily for smaller, independent film and TV productions.  That bill sailed through the House with minor amendments and crossed over to the Senate.

In the meantime, Senate Bill 1237, as introduced, proposed establishing a Hawaii film commission that would replace the current Hawaii film office.  That measure passed the Senate economic development committee (EET) with no changes and headed to Ways & Means (WAM).  After deferring the measure multiple times, WAM amended the bill to add two new provisions:  a section allowing tax credits for building a film studio, and a section making extensive amendments to the administration of the existing production credit.  This was done without the benefit of a public hearing, ostensibly because the bill was already heard in one previous committee.  It crossed over to the House in that form, where the House economic development committee refused to hear the bill.

The Senate, apparently incensed over the roadblock in the House, took up HB 1373.  It was not heard by its first assigned committees, EET and Labor, and was technically dead after the Second Crossover deadline.  But the Senate revived it by re-referring it to joint consideration by WAM and EET.  Those committees then shoved the studio credit and the production credit amendments into it.  The bill did have a hearing, but on the version containing the workforce development incentive only.  No proposed draft of the amended bill was released before the hearing.  The new parts of the bill had not been heard at all.

Some further amendments were made on the Senate floor, and the bill went back to the House.  Both chambers now need to appoint conference committee members to hash out the differences between versions, and that is where the bill stood as of the story deadline.

This bill now has problems.  One of them is the lack of opportunity for public participation in two of the key parts of the bill as it exists now.

The second issue is the bill’s title, “Relating to Workforce Development.”  The workforce development incentive clearly fits the bill’s title.  The other two parts, not so much. 

Next, there are federal constitutional issues with the production credit amendments.  The production credit as amended would give a 20% credit on out-of-state payroll and a 25% credit on in-state payroll, for example.  That would be a problem under the U.S. Constitution’s Commerce Clause, which basically says we’re all Americans and States shouldn’t be discriminating against each other.  It’s like telling Hawaiians from Papakolea that they’re going to be taxed more heavily than Hawaiians from Waimanalo.

Note to lawmakers:  There are reasons why our Constitution has public hearing requirements.  Our supreme court banned gut-and-replacing for these reasons.  Do you need more convincing?