Surf movie gets tax break meant to lure high-tech
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By Jim Dooley
Advertiser Staff Writer
A teen film called "Surf Girls" will get almost $16 million in special state tax breaks that were supposed to be used to attract high-technology ventures and permanent jobs to Hawai'i.
Bruce Asato • The Honolulu Advertiser
The tax breaks were approved last year under legislation known as Act 221, which was developed to increase high-tech growth in the Islands by offering 100 percent tax credits to investors in companies that do business here for at least five years.
A camera crew for "Surf Girls" shoots footage at Pipeline. The $30 million movie is scheduled for release this summer.
Since Act 221 took effect last July, about $29.7 million in tax credits have been granted, mostly for high-tech endeavors such as a biotech company specializing in genetic engineering, a telemedicine company that can help people monitor their health and an online enterprise that helps companies raise money for charity.
But more than half, $15.7 million, was approved for the production of "Surf Girls." It is the only film or television project that has qualified for the benefit, according to the Hawai'i Technology Trade Association, a private group that promotes high-tech businesses.
The $30 million film, produced by Beach Orchid Film Productions, a company registered in Delaware, will benefit from the legislation by having a group of Hawai'i investors pay for making the film and then take state tax breaks — capped at $2 million per investor — in return.
Joe Blanco, Gov. Ben Cayetano's special adviser on technology development, was a key supporter of Act 221 legislation and said it makes sense for the state.
"At the end of the day everybody wins," Blanco said. "Investors get tax credits, their projects create jobs and begin to build a base of technology companies that can help diversify our economy."
Blanco's promotional material for Act 221 says the people who benefit from the tax-credit program are "high net-worth Hawai'i taxpayers looking to offset state income tax liability." The identities of those who invest and details of how companies quality for the tax credits are kept confidential by the state Tax Department. It is also unclear why "Surf Girls" is the only television or film project to qualify for the credits established under Act 221 or why it accounts for more than half of all the tax credits that have been granted thus far.
'Baywatch' wounds still hurt
Hawai'i already has tax credits of 4 percent for all nonpayroll expenses for film and TV productions that qualify under a separate law and a 7.25 percent tax credit for hotel expenses.
During 1999-2000, about 130 investors received $440,000 in tax credits under those provisions. Legislation introduced this year would offer film companies tax credits of up to 22 percent of their employee payrolls, which would cost the state $1.2 million a year.
Some have questioned the effectiveness of such tax breaks and incentives, especially since most cast and crew members often come from the Mainland. The massive public and private effort in 1999 to lure the syndicated "Baywatch" series to Hawai'i resulted in more than $7 million spent or donated to the series in free air fares, hotel rooms, production, infrastructure and write-offs. But the show was canceled less than two years later with little tourism-related windfall to show for it.
Act 221 was supposed to entice new movie and television production companies to come here and stay in business for at least five years. But Amy Kastens, head of the Maui Film Office, who worked closely with the producers, script writer and director when the "Surf Girls" project was in the planning stages, said Beach Orchid had committed to coming to Hawai'i well before Act 221 was passed.
Company might not stay
According to various descriptions of the movie, "Surf Girls," which features a largely unknown cast, is aimed primarily at teen audiences and tells the story of young women trying to break into the world of competitive surfing.
It is scheduled for release this summer.
It is also unclear whether Beach Orchid, which registered to do business here in October and began shooting "Surf Girls" on the North Shore two months later, will remain here past April 1, the date it has informed the state it will depart Hawai'i.
A spokesperson for Universal Studios, which is distributing the film, would not discuss whether the company sought tax breaks, lined up investors or how long it planned to work in Hawai'i.
"We would really have no way of knowing because we evaluate our films and our financing and our locations on a case-by-case basis," she said.
Donne Dawson, director of the Hawai'i Film Office, said she would be troubled if Beach Orchid did not remain here for the next several years.
"It was not my understanding that Act 221 was really applicable to one-time projects that shoot here and leave," she said. "It was meant to apply to firms willing to invest here for the long term."
Even if Beach Orchid closes its doors in the first year of doing business, the law still allows its local investors to benefit substantially from state tax credits.
Number crunching
The law allows an investor to take a 35 percent tax credit in the first year of business. There's a 10 percent penalty — 10 percent of the credit, not 10 percent of the total investment — if the company stops doing business during its first year of operation.
For example, an investment of $2 million — the maximum allowed under Act 221 — equals a tax credit of $700,000 in the first year. Even if the company closes and the state imposes the 10 percent penalty, the investor still gets $630,000 of state tax debt wiped off its books.
For a more modest investment of $20,000, the tax break is $7,000 in the first year. If the business does not continue, the investor still gets a $6,300 tax break.
Rep. Charles Djou, R-47th (Kahalu'u, Kane'ohe), said another provision in the law allows Mainland investors to sell or transfer Hawai'i tax credits they earn to local taxpayers.
"The Mainland guy doesn't need Hawai'i tax credits because he doesn't pay taxes here. So he can give them or sell them to the Hawai'i guy for pennies on the dollar or whatever the market will bear," Djou said.
Amendments sought
During this legislative session, the state Tax Department has moved to radically amend Act 221, requiring that at least half the "postproduction work" on a film or television show must also be performed in Hawai'i to qualify for the tax credits.
Postproduction is considered the high-tech end of moviemaking and involves such things as editing, animation, graphics, audio production and special effects, state officials said. Little is now done in Hawai'i because there are few facilities or trained technicians here.
"This change will encourage the development of postproduction facilities in Hawai'i and will create more jobs in the film industry," Tax Director Marie Okamura told the Legislature last week.
Regardless of whether the amendment survives, Beach Orchid has already qualified for the tax credits under the existing law.
"It makes absolutely no sense," said Lowell Kalapa of the Tax Foundation of Hawai'i. "It's still too expensive to shoot a film here. There's not enough infrastructure. The tax credits are just a big carrot that the Hollywood bunny is going to gobble up. And then the bunny's going to hop back home."
Reach Jim Dooley at jdooley@honoluluadvertiser.com or 535-2447.
