HI. TECH
Film producers, high-tech firms should be collaborators, not competitors

By John Duchemin
Advertiser Staff Writer

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But thanks to the government's well-intentioned but flawed attempt to include both in the Act 221 tax incentive law, the industries are now at each others' throats.

Technology advocates are happy that investors are taking advantage of Act 221 to provide money for more startup technology companies than ever before. The act allows investors to claim non-refundable state tax credits worth 100 percent of an investment.

In the last quarter of 2002, at least 12 companies received venture investments totaling more than $25 million. By Hawai'i standards, that's an amazing amount of money committed to high-tech companies. Those companies are better equipped to expand facilities, hire employees, develop products and make sales around the Pacific Rim and beyond.

But the Hawai'i technology industry still doesn't know whether to embrace Act 221 for its obvious benefits, or criticize it for its inclusion of the film industry.

Movie studios have repeatedly taken advantage of an Act 221 provision that includes performing-arts companies as "qualified high-technology businesses." Now, at least two big studios have used Act 221 to help generate local investments — not in startup technology companies, but in movies. First came Universal Studios' surf romance "Blue Crush"; the latest, filmed last fall, is Warner Bros.' $50 million "The Big Bounce."

Film producers, plus the lawyers and accountants and investors who have structured 221-leveraged movie deals, see benefits: Each movie project creates hundreds of jobs, at least temporarily, and spends money in magnitudes only dreamed of by Hawai'i's technology companies.

But some high-tech advocates suffer from tax-credit envy of the "your investment is bigger than mine" sort. They fear that money is being drained from technology companies by film investments. Their arguments have grown increasingly vocal.

"Act 221's dirty little secret is that most of its tax credits have nothing to do with high-tech, nothing to do with investment, and nothing to do with starting local ventures," wrote Tareq Hoque, outgoing chairman of the Hawai'i Technology Trade Association, in an opinion piece in Sunday's Advertiser.

"The state essentially has given these out-of-state movie producers a blank check into its tax revenues, with no oversight mechanism and no cost-benefit determination process," continued Hoque, whose own company, Landmark Technologies, received $1.5 million in investments at the end of 2002 in an Act 221-leveraged deal.

The concerns of Hoque and others have generated a new political push to change the law. Legislation sponsored by Sen. Colleen Hanabusa would limit Act 221 eligibility to "fully digitized computer-generated animation" films or TV shows. Senate President Robert Bunda supports a bill that would require 50 percent of a film's post-production work be done in Hawai'i. Both bills would likely kill most future Act 221 film investments.

Such developments are undoubtedly mortifying to film industry backers who have been trying their best not only to quell public controversy ever since "Blue Crush" secured Act 221 approval in late 2001, but to use the act to draw more movies. The hope is that Warner Brothers and Universal executives will tell their Hollywood brethren about that wonderful tax incentive over in Hawai'i, leading to further projects here — and perhaps a substantial studio and production presence.

But advocates fear the Act 221 debate, which has generated articles in the San Francisco Chronicle and other Mainland publications, will scare away Hollywood.

The sad irony is that the high-tech industry and the film industry both benefit from the other. Films provide plenty of work for programmers and digital specialists, while high-tech firms provide skilled workers and contractors for use in production.

But Act 221, by encouraging both industries to pursue the same types of deals, makes them competitive, not collaborative.