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By Sumner La Croix and James Mak
Blog: The Hawaii Film Tax Credit: An Update
Hawaii is one of 32 states in 2020 to offer a tax credit to film, TV, and digital productions through the Hawaii Motion Picture, Digital Media and Film Production Tax Credit (hereafter “film credit”). Since the passage of the film credit in 2006, spending in Hawaii on TV/film productions has soared, with inflation-adjusted spending increasing by 116 percent between 2007 ($164.5 million) and 2019 ($355.6 million). This is much larger than the overall increase in Hawaii real gross domestic product over the same period, a modest 17 percent. The industry’s strong performance raises the question of whether its rapid expansion can continue for another decade and contribute measurably to diversification of the state economy.
Hawaii’s film credit is a refundable tax credit that provides a subsidy equal to 20 percent of qualified production costs incurred in Oahu and 25 percent incurred in Maui, Hawaii and Kauai counties. There is an annual cap on credits received by a particular production ($15 million) and an annual cap on aggregate credits dispersed to all productions ($50 million). Credits that exceed the cap can be rolled over to the following year. The credit sunsets on January 1, 2026.
Hawaii is not the only state or country to offer a film credit. Thirty-two states, three U.S. territories, and at least 60 countries offer film credits. The percentage of local expenditures subsidized by film credits has increased, with the median value rising from 2 percent of qualified production costs in 1998 to 15 percent in 2001-2006, and to 25 percent in 2009-2015.
Why does a production company choose Hawaii as the location to film its project when costs of labor and rented capital are lower in many other locations? The main reason is the access the company gains to natural and cultural capital—Hawaii’s diverse natural landscapes, near perfect weather, the unique urban landscapes of the tropical city of Honolulu, and the many cultures intermingling in the islands. A production company will also consider the net of credit cost of filming a project in Hawaii vis-à-vis the net of credit cost of filming in another location. This means that film/TV spending in Hawaii depends not just on the size and scope of film incentives offered by the State of Hawaii but also on the size and scope of film incentives offered by other U.S. states and foreign countries.
Why are states willing to pay subsidies to attract film/TV projects to their locales? It is partly because additional production spending generates additional direct and indirect (multiplier) spending in the state. The Hawaii DBEDT estimates that film/TV production spending generates substantial additional output, earnings and jobs for Hawaii residents. We offer suggestions on how the Department of Business, Economic Development and Tourism (DBEDT) might conduct a more rigorous analysis of the impact of the film credit.
There is more to building a robust film industry in Hawaii than just having a competitive film credit. Two other factors that attract film/TV productions to Hawaii are availability of workers with skills valued by the industry and availability of state-of-the-art production studios. Expanded undergraduate education programs and facilities dedicated to film/TV/digital production at UH campuses are providing college students with skills and overall knowledge valued by film/TV/digital production companies. The brand new UH-West Oahu facilities have the potential to make UH’s Academy of Creative media one of the leading schools for content production in the United States. With roughly 250 undergraduate majors expected when the new UH-West Oahu facilities open for in-person learning later this year, content production companies filming in Hawaii will find it easier to staff jobs in their productions with local talent, while other UH program graduates will be encouraged to start their own companies. Learning-by-doing for the many workers involved in the long-running Hawaii 5-0 and the new Magnum PI TV series has made them more skilled, more experienced, and more valuable employees. The combination of skilled, experienced local talent and fresh graduates from the Academy of Creative Media will serve as a magnet for production companies to choose Hawaii for future ventures.
Private investment in a film studio(s) for use by Hawaii and overseas production companies has potential to attract more film/TV projects to Hawaii. In general, U.S. states with thriving film industries are ones where substantial public and private capital investments in production studios and ancillary facilities have taken place. Private investors have, however, not made substantial investments in facilities for the film/TV industry in Hawaii. Recently, an adjacent site on Farrington Highway near the new UH-West Oahu facilities has been identified as a potential site for a private production studio to be developed with private funding on university land. We note that private construction of a major new film studio could help to counter expected declines in State of Hawaii construction (CIP) spending over the next few years. Given today’s extremely low cost of borrowing, even a modest return on investment could make a new studio viable for private investors.
The combination of an experienced labor force, new educational programs and training facilities offered by the Academy of Creative Media at UH-West Oahu, a respectable but not overly generous film credit, and reasonable prospects for new studio construction by private investors should leave Hawaii well positioned for a balanced, grounded expansion of the content production industry. We have three main recommendations for policy changes with respect to the film credit.
- Extend the sunset date for the film credit to 2030. Investors in a film studio project will need have some commitment by the State of Hawaii to a long-term presence of the film credit when they make commitments to building much needed new studio facilities.
- Raise the aggregate cap on the film credit from $50 million to $75 million. If the film credit is generating net benefits for Hawaii’s people, there is no reason to restrict it to just a few projects. That said, we also favor retention of an aggregate credit cap to facilitate state budgeting and to prevent unanticipated “gaming” of the film credit by producers.
- Limit rollovers of film credits for current projects to future years. Future state budgets should not be burdened by payment of film credits for activities conducted several years earlier. We recommend that rollovers be limited to 20 percent of the aggregate credit cap.
Photo by Ryan Gobuty/Gensler and UH Academy of Creative Media.
2 thoughts on “Understanding the Role of the Hawaii Film/TV/Digital Production Tax Credit In Diversifying the Hawaii Economy”
I admit to a bias against paying companies, film or otherwise, to come to Hawaii. If the story they are filming requires our scenery, culture or even political stability, they will likely come without the payment. If not, then we are simply in a bidding war with another location that will be won by the location with the most money to burn. That amount of money, of course, reduces the net benefit to the “winning” bidder.
I saw that play out in the early 1990s in Germany when Mercedes announced it would build a plant in the U.S. I don’t know if Mercedes started the bidding war or one of the states, but we saw a line of American state governors make pilgrimages to Stuttgart, each offering more than the last. You know Daimler-Benz didn’t need the money, but can’t blame them for taking it. Wonder if Alabama has hit break even yet.
That said, I like the idea of state and local governments investing in things, such as a modern film studio or training, to attract companies. The “Field of Dreams” is generally correct. They will come.
I hear ya, Steve (Craven): like they were gonna film Hawaii Five-O in Georgia. My take is illustrated in three anecdotes. First time I ever met U.S. Senator Maize Hirono–who I admire, don’t get me wrong–I groused about the film studio that the state built at Diamond Head for Magnum, P.I. (the one with the periods; the 1980s one). Turns out that was in her legislative district, and voters thought it was cool. Democracy. My classmate at Wisconsin, Tim Bartik, has argued that inter-jurisdictional competition among states through tax credits inefficiently distorts the spatial (geographic) allocation of capital, a point to which Steve’s comment alludes. Besides, nobody gives plate lunch-makers a 20 percent refundable tax credit because it “diversifies the economy.” Once I was videotaped by ThinkTech Hawaii on this topic as a commercial bank economist. I noted that the state’s 20 percent refundable film production tax credit acts (no pun intended) as equity financing in the capital stack. Mezzanine tranches and syndicated bank loans finance rest, but producers keep the “equity” in the film–and the residuals–even though the State of Hawaii provides the equity. Dude with a walk-on role whose line is “WHAT” gets actor’s equity and a SAG card, but not the State of Hawaii. The moral of these stories is: (1) keep voters happy; (2) distort capital allocation; and (3) get someone else to pay for your food truck, I mean, your film. This can’t be as sophisticated as Hawaii’s economic development strategy gets: “Everything has multipliers.” No duh. Social cost-benefit analysis? We The People are investors in these films: what are our investment returns? What are the values of film production externalities? What’s the option value of streaming? Is Hawaii an influencer or is it culturally appropriated? Does Hawaii own Proof of Stake or Proof of Work NTFs on this Hawaii film opus? Are Hawaii’s intellectual property rights secure? Agree with Mak and Lacroix: how about the Ledge finances a project team leader and some grad students to do the economics (from all the money Hawaii makes off films)? Enough winging it.