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By Sumner La Croix and James Mak
In 1997, Hawaii was one of the first states to grant tax credits to attract content producers to film their projects in the state. As of January 2021, 32 states offer tax credits to defray qualifying expenses of filming movie/TV productions. The competition to attract film/TV productions now involves U.S. territories and many foreign countries. Over the years, film/TV/digital content tax credits (hereafter “film credit”) implemented by Hawaii and other jurisdictions have become increasingly generous. Recent studies on the economic impacts of state film credits have largely been critical of very generous film credits.
In a recent (March 15, 2021) UHERO brief, we reviewed Hawaii’s film credit to consider whether the film credit yields a favorable return to Hawaii’s residents. Act 89, SLH 2013 requires the Department of Business, Economic Development and Tourism (DBEDT) to conduct an annual cost-benefit analysis of Hawaii’s film credit. Since 2013, the State of Hawaii Film Office has issued annual reports on film/TV production spending eligible for the Hawaii film credit. The reports show that after the 2006 film credit was implemented, inflation-adjusted film production spending more than doubled between 2007 and 2019, growing at a far faster pace than the state’s economy thus contributing to the state’s goal of diversifying the Hawaii economy. Rapid growth of an industry receiving state subsidies is, however, far from unusual, and does not answer the question of whether the benefits derived by state residents from the film credit exceed its costs (in foregone opportunities) to Hawaii residents as tax revenues lost from granting film credits have alternative uses. We argued that a comprehensive analysis of the benefits from the film credit should (1) exclude out-of-state film/TV production related expenditures which qualify for Hawaii’s film credit; (2) account for the share of productions that would have occurred in Hawaii even if the state did not offer film incentives; and (3) account for increased exposure provided to potential visitors by films and TV series filmed in Hawaii.
Shortly after we posted our policy brief, DBEDT released a report, Cost-Benefit and Fiscal Impact Analysis of Hawaii’s Film Tax Credit in 2019. The report is informative, and uses a more detailed methodology than previous DBEDT reports to evaluate the film credit. DBEDT’s cost-benefit analysis considers a variety of different scenarios for evaluating the credit. One scenario assumes that in the absence of the film credit, all of the film/TV productions that received the credit would not have been filmed in Hawaii. An alternative (“redundancy”) assumption for calculating net benefits from the film credit is that a portion of film production expenditures would have occurred even without the film credit. DBEDT assumes the “redundant” portion is equal to the 10-year average of expenditures from 1987 to 1997 (adjusted for inflation) before the film tax credit was introduced in 1997.
In 2019, 39 film/TV productions incurred $311.2 million in production-related expenditures that were eligible for $65.4 million in Hawaii film tax credits. DBEDT’s calculations show that expenditures associated with each dollar of qualified film credit in 2019 increased the state’s gross domestic product (GDP) by between $2.51 and $3.92, and increased household income by between $1.58 and $2.44. DBEDT’s cost-benefit analysis also does not include estimates of how many tourists and their spending in Hawaii might have been influenced by exposure to films/TV programs made in Hawaii. That exclusion results in a downward bias of the benefit-cost estimate. DBEDT’s analysis also finds that the state treasury does not recover all of the tax revenue lost after distributing the tax credit. For each dollar of film credit distributed to film/TV producers, the state treasury was able to recover only between 36 cents and 50 cents in tax revenue from film/TV-related production spending. However, the economic rationale for offering a film tax credit is not based on whether they pay for themselves in the short run. Typically, they do not. The purpose of the film tax credit is to promote economic growth, a conclusion supported by DBEDT’s recent report.
Photo by Ryan Gobuty/Gensler and UH Academy of Creative Media.