STAND. COM. REP. NO. 565

Honolulu, Hawaii

, 2005

RE: S.B. No. 541

S.D. 1

 

 

Honorable Robert Bunda

President of the Senate

Twenty-Third State Legislature

Regular Session of 2005

State of Hawaii

Sir:

Your Committee on Media, Arts, Science, and Technology, to which was referred S.B. No. 541 entitled:

"A BILL FOR AN ACT RELATING TO DIGITAL MEDIA,"

begs leave to report as follows:

The purpose of this measure is to augment incentives that attract digital media, television, and film production companies to the State by changing the motion picture and film production income tax credit to an unspecified amount against a taxpayer's income tax and transient accommodations tax liability.

Testimony in support of the measure was received from an individual. The Departments of Taxation and Business, Economic Development, and Tourism supported the intent of the measure.

The Tax Foundation of Hawaii and one individual submitted comments on the measure.

Your Committee views this measure as an integral component of a comprehensive strategy to enhance the State's position in the competitive world of digital media production while solidifying Hawaii's digital media infrastructure and labor force so that it can play a significant and starring role in Hawaii's 21st century economy. Without the incentives that this measure provides, Hawaii will stand to lose millions of dollars in potential future revenues generated by the various digital media productions that would have otherwise been attracted to the State if not for finding more favorable incentives elsewhere in the world.

Your Committee further believes that the specific goal of Hawaii's digital media production tax credits should be to diversify Hawaii's economy through the expansion of the State's motion picture, television, film, music, and other digital media production capabilities and to support and build the local workforce and infrastructure needed to sustain the long-term growth and vitality of Hawaii's digital media industry. By thinking globally and acting locally, this measure establishes production tax credits that also seek to maximize the amount of production work in Hawaii as a means of providing on-the-job training for the local digital media industry and technical workforce.

Your Committee envisions a digital media production industry in Hawaii that would be able to accommodate a $300,000,000 production project. Such a production would employ at least sixteen thousand industry professionals (animators, producers, directors, etc.) - four times the State's current digital media employment capacity of four thousand professionals. This long-term vision will require the State and the digital media industry to partner in supporting the growth of digital media programs such as those at Waianae High School, Moanalua High School, Kalaheo High School, and the Kamehameha Schools, as well as the University of Hawaii's Academy for Creative Media to provide the existing workforce with innovative on-the-job training and mentoring programs and educational opportunities for aspiring secondary and post secondary students interested in digital media-related careers.

One successful example of such an incentive program is New Mexico's fifteen per cent production expenditure tax credit and fifty per cent wage reimbursement program. Due to it's lack of experienced production crew personnel, New Mexico established a Workforce Training and Mentorship Program so that local residents could receive on the job training and, as such, New Mexico would benefit by keeping the skills learned within the state.

Another success story can be found in New Zealand, where the government believed that the chronicling of New Zealand's rich culture and heritage through song, dance, and chant was an important reason to support its local filmmakers. This support eventually provided Peter Jackson with the incentives necessary to convince New Line Cinema to spend $300,000,000 on filming the Lord of the Rings Trilogy there. This project was followed by the $100,000,000-plus productions of The Last Samurai, Narnia, and King Kong.

Based on the successful incentive paradigms utilized in New Mexico and New Zealand, your Committee has developed a strategy to tie the future use of the so-called "Act 221" high technology business tax credit, as amended by Act 215, Session Laws of Hawaii 2004 (Act 221) by digital media production companies to participation in training and educational programs for Hawaii residents.

In light of the potential positive impact the measure could provide on the State's economy, your Committee has amended the measure by:

(1) Incorporating the language and concepts from S.B. No. 651, Relating to Motion Picture and Film Production and S.B. No. 716, Relating to Tax Credits for the Film And Television Industry;

(2) Amending section 235-7.3, Hawaii Revised Statutes, to add digital media to the definition of "performing arts products" so that it mirrors the definition of "performing arts products" added to section 235-110.9, Hawaii Revised Statutes;

(3) Amending section 235-110.9, Hawaii Revised Statutes, to add a new definition for "performing arts products", and to add language to the definition of "qualified high technology business" to clarify that businesses claiming the tax credit under this section in taxable years beginning after December 31, 2005, shall provide proof to the Department of Business, Economic Development, and Tourism of educational or in-kind support of Hawaii secondary or post-secondary performing arts programs, employment of Hawaii residents, and use of facilities in the State;

(4) Increasing the existing four per cent tax credit on Hawaii qualified production expenditures to fifteen per cent for productions on Oahu and twenty per cent for productions on the neighbor islands;

(5) Allowing a qualified production to receive a wage reimbursement tax credit for an unspecified percentage of the wages paid to below-the-line hires that are Hawaii residents;

(6) Deleting the tax credit for transient accommodations taxes established under section 235-17(b), Hawaii Revised Statutes;

(7) Requiring that motion picture or film productions expend a minimum of $200,000 in the State to qualify for the tax credit;

(8) Requiring that a sound recording production expend a minimum of $20,000 in the State to qualify for the tax credit;

(9) Requiring that a production that qualifies for the tax credit provide the State with a shared-card, end-title credit;

(10) Requiring that productions interested in claiming the tax credit be pre-qualified by the Department of Business, Economic Development, and Tourism;

(11) Establishing record keeping and reporting requirements for the Departments of Business, Economic Development, and Tourism and Taxation;

(12) Defining terms such as "below-the-line hires", "commercials", "digital media", "post-production", "production", "qualified production", and "qualified production costs";

(13) Prohibiting the claiming of tax credits under both the production expenditure tax credit established under section 235-17, Hawaii Revised Statutes, as well as the investment tax credit established under section 235-110.9, Hawaii Revised Statutes;

(14) Capping tax credit claims at $8,000,000 per production;

(15) Requiring the Department of Business, Economic Development, and Tourism, in consultation with the Department of Taxation and the county film offices, to develop an appropriate revenue generation and economic benefit model to determine the economic impact of the enhanced film and digital media tax credits established under this Act;

(16) Requiring the Department of Business, Economic Development, and Tourism, beginning with the 2005 Regular Session, to annually submit reports on the film and digital media production expenditure, revenue projection, and revenue realization information to the Legislature until the 2011 Regular Session; and

(17) Making the amendments made to the enhanced film and digital media tax credits applicable to taxable years beginning after December 31, 2004.

During its deliberations, your Committee heard concerns over the potential tax revenue loss to the State if the enhanced film and digital media tax credits contained in this measure were enacted. Your Committee received comments from the Department of Business, Economic Development, and Tourism opining that, if a film or digital media production claimed the already available "Act 221" high technology business tax credit, the State could stand to lose substantially more tax revenue than if the same production claimed the enhanced tax credits provided under this measure. The Department of Business, Economic Development, and Tourism bases its opinion on the fact that, under Act 221, investors are allowed to claim the value of Hawaii-generated capital at a 2:1 ratio against their tax liability. Essentially, under Act 221, each Hawaii investment dollar invested generates $2 of tax credit. Under this measure, the production tax credit is only a dollar-for-dollar credit, up to a maximum of fifteen or twenty per cent of the total cost of production expenses realized in Hawaii.

Your Committee believes that the amended measure will provide the incentives necessary to attract more digital media productions to the State while concomitantly finding innovative ways to bolster the State's economy, developing the local digital media production industry, training future local digital media pioneers, and maintaining fiscal responsibility.

As affirmed by the record of votes of the members of your Committee on Media, Arts, Science, and Technology that is attached to this report, your Committee is in accord with the intent and purpose of S.B. No. 541, as amended herein, and recommends that it pass Second Reading in the form attached hereto as S.B. No. 541, S.D. 1, and be referred to the Committee on Ways and Means.

Respectfully submitted on behalf of the members of the Committee on Media, Arts, Science, and Technology,

____________________________

CAROL FUKUNAGA, Chair