Film industry shies away after tax-credit backlash

By John Duchemin
Advertiser Staff Writer

Recent difficulties and controversy surrounding the movie industry's use of the state's high-technology tax incentive known as Act 221 are frustrating film producers, industry advocates say, and they fear that Hollywood's recent interest in Hawai'i may be in jeopardy.

Despite a surge in the entertainment industry's interest in Hawai'i, inspired in part by Act 221, state film officials say that producers are growing increasingly frustrated by problems in obtaining the tax credit, and are alarmed by negative publicity surrounding the act.

Calls by outgoing Gov. Ben Cayetano and others to eliminate movies from the act, which was intended for the technology industry, have raised concerns that the incentive will disappear before the industry can benefit, making Hawai'i less competitive as a movie location and harming its credibility in Hollywood.

A recent lawsuit over the Act 221 deal that brought filming of the surf movie "Blue Crush" to Hawai'i threatens to create further concern, observers say. Entertainment executive April Masini's malpractice suit against a Honolulu law firm is characterized by many as a typical Hollywood squabble over profits. But with the "Blue Crush" deal a lightning rod for Act 221 critics, the lawsuit could increase negative sentiment — especially as it promises to reveal intimate details of the movie deal.

"The people I'm dealing with, they see all this bad press, see people saying these deals are abusive, bad, and no one likes them," said Nancy Grekin, a Honolulu lawyer representing producers of "The Big Bounce," a movie project starring Owen Wilson that wants to film in Hawai'i and is seeking Act 221 tax credits.

"They're feeling sour about it — like, 'Don't you want us here? Don't you want our money?' " added Grekin, an attorney with law firm Goodsill Anderson Quinn & Stifel. "If you've got a half-dozen states out there offering their own incentives, versus our state where you see front-page headlines saying movie deals are abusive, which one would you pick?"

Film industry observers note that Act 221 is not the only lure for movie productions to come to Hawai'i. The state has a tax package for the film industry — rebates on 4 percent of production costs and on 100 percent of the transient accommodations tax.

But the combination of that tax package with Act 221 has finally given Hawai'i a powerful tool to lure productions after years of being outfought by other locations, said state Film Commissioner Donne Dawson. Act 221's performing-arts clause, a last-minute legislative addendum to the high-tech bill, allows movie producers access to the half-dozen tax credits allowed under the act.

Act 221, designed to stimulate the technology and performing arts industries, lets the government grant 100 percent state tax credits to investors in movie productions. The act's passage in 2001 led to a surge in the entertainment industry's interest in Hawai'i, to $18 million in credits to investors in "Blue Crush," and to millions of dollars in Hollywood money spent in the islands.

"When productions compare Hawai'i with other places, dollar for dollar, they look at Act 221 as very attractive," Dawson said. Industry representatives call the film office at least once or twice a day looking for information on the act, she said. "There's no doubt that it has generated a tremendous amount of interest in Hollywood."

Thanks in part to the act, studios including 20th Century Fox, Warner Brothers and Columbia Pictures — along with Universal, which filmed "Blue Crush" — have scouted Hawai'i or filmed here, leading state officials to predict that 2002 film industry expenditures in the state will rise from last year's $70 million.

But problems are beginning to emerge when productions actually try to get the Act 221 credits, Dawson and Grekin said, because the state Department of Taxation has grown stricter in its interpretation of the law in the last seven months as criticism has mounted.

Critics including Cayetano have said the act's language is too liberal, leaving the bill open for exploitation or abuse. Some have argued that the "Blue Crush" deal is a prime example. Because "Blue Crush" producers left the state after filming, critics say the movie was a one-shot deal, at taxpayers' expense.

Cayetano-sponsored amendments to Act 221, tightening the performing-arts rules, failed in the Legislature last spring. But Cayetano technology adviser Joseph Blanco said the governor is still pushing lawmakers to seek new amendments in the next legislative session, even though his term officially ends tomorrow.

Meanwhile, the Masini lawsuit against Honolulu law firm Cades Schutte Fleming & Wright over the terms of the "Blue Crush" tax-credit deal has enflamed further debate.

Masini has contended that the firm committed fraud and malpractice by squeezing her out of the deal. The law firm has denied the charges, and in late October filed a 17-point defense. But the suit has now entered a stage where the previously-private details of the deal could be revealed.

Masini has subpoenaed many of the state's most influential film officials, demanding they produce correspondence in court relating to the "Blue Crush" deal. Among those subpoenaed are Dawson; the film commissioners for each county; and Blanco, who helped bring Masini together with Cades Schutte and, the lawsuit has alleged, urged the Tax Department to issue a favorable "comfort ruling" for the movie investors.

The lawsuit is of particular concern now because it comes at a time when the public has been debating Act 221, observers said.

"This seems like a typical Hollywood kind of dispute," said Tony Clapes, a Honolulu lawyer and longtime observer of the technology industry. "If we were all living in Los Angeles, we would not consider this case to have any jeopardizing effect, because the issues really don't involve Act 221. But with new people coming into office, and open issues as to how Act 221 can be used, 'Blue Crush' sort of hangs over everything."

Tareq Hoque, president of the Hawaii Technology Trade Association, and others in the technology industry have said "Blue Crush" has placed a stigma on a tax credit and has diverted investor money from small technology firms — the originally intended recipients — to large start-ups.

"This is a perfect example of how Act 221 should not be used," said Hoque, referring to "Blue Crush," on Oct. 24, three days after Masini filed her lawsuit.

And as the controversy continues, films like "The Big Bounce" are running into delays as they attempt to get Act 221 "comfort rulings," indicating they would likely qualify for tax credits, from the tax department, Grekin said.

"(Tax officials) have made it clear they feel pressure, because of the bad publicity about 'Blue Crush,' to administratively tighten things up," she said.

Tax Director Marie Okamura said the department remains committed to interpreting Act 221 as liberally as possible, and to issuing comfort rulings within two weeks. She said some rulings take longer if the department has specific questions.

Other delays, Okamura said, come from the department's inadequate staffing — two employees are tasked with hundreds of applications — and from the misplacing for several months of a box of comfort ruling applications.

"When someone submits a request, we try to turn it around in short order," Okamura said.

But Dawson said a growing number of film executives are starting to feel that the process has slowed significantly since "Blue Crush" received its tax credits, and that too few now are finding the process worthwhile.

The danger is that film companies will cease to see Act 221 as a useful incentive and turn to other locations that have other types of movie tax incentives such as Australia, she said.

"When one production comes to a location and is able to benefit in some way, the next production is going to want the same thing," she said. "A lot of people in the industry feel the proverbial carrot has been dangled, yet the benefits are not being realized, so some feel let down.

"That's why Hawai'i's credibility is on the line here. Since what happened to 'Blue Crush' hasn't happened for ensuing productions, there's a feeling of tremendous disappointment."

Reach John Duchemin be e-mail at jduchemin@honoluluadvertiser.com or by phone at 525-8062.