More Taxes for Movies and TV
By Tom Yamachika, President
 
We have been railing for some weeks now about the goings-on at our Legislature.  This week we spotlight the Department of Taxation.
On February 16th, the Department published a Tax Information Release, a public statement of interpretation of the law, relating to the TV and movie production industry.  To understand that release, we need to go into a little background first.
When we see Hawaii’s General Excise Tax or GET, it is usually on a sales receipt and the tax shown is 4.712% or 4.166%, depending on the island you are on.  That rate is driven by what we call the retail tax rate, which is applied to sales from a seller to an end user.
The GET also is applied to intermediate stage products and services, namely those that are sold not to an end user but to a retailer, or someone further up the production chain.  For example, consider a farmer selling vegetables to a market, or a fashion designer selling artwork to a manufacturer who will be making aloha shirts with that artwork.  There, the GET is imposed at the “wholesale rate” of 0.5% instead.
When movie and TV productions are made, not all of the people participating in the production are on the payroll.  A few, such as principal cast, the director, and others in key roles like the director of photography, are independent contractors to the production.  Many of them have entities they own, known as “loan-out entities,” which then contract out to the production.
What, then, is the GET rate that applies when a loan-out entity is paid by the production company?
In 2008, the Department of Taxation published proposed rules containing several key GET interpretations.  In Proposed Admin. Rule sections 18-237-13-01.01(b) and 18-237-13(6)-10(b), which appeared in Tax Information Release 2008-02, the Department said that a production company is in the business of manufacturing, and a loan-out entity providing services to the production company qualified for the 0.5% wholesale rate.  The proposed rules were reproposed in modified form in Tax Information Release 2009-05, but in the same proposed rule sections the Department reaffirmed that the GET interpretations above were still good and could be relied upon by taxpayers.
During the next ten years, the Department decided not to finalize these proposed rules, instead publishing revised temporary rules that only addressed the income tax credit for productions and did not include any GET rules.  After finalizing the rules, the Department published an Announcement in November 2019 ostensibly to summarize the rules that were adopted, but it added a note, seemingly out of right field, saying that a “production company is not considered to be in the business of ‘manufacturing’ [for GET purposes].”
Tax Information Release 2021-01, the interpretation published on February 16, explains that “the Department reviewed its position on deeming a motion picture or television film production company to be engaged in the business of manufacturing.  Through this review, the Department determined that this prior position was inappropriate.”  In other words, the Department changed its mind, and loan-out entities are now taxable at the full retail GET rate.  Neither the Release nor the prior announcement showed any reasoning from the applicable law (which did not change in the meantime) even attempting to justify the Department’s about-face.
“I am altering the deal,” the Department is effectively saying.  “Pray I don’t alter it any further.”
Folks, this is Hawaii, not “The Empire Strikes Back.”  The Department is given authority to make published pronouncements and adopt rules so people know and can plan business activities that follow the law. If the law changes because of legislative action or a court decision, that’s one thing.   Or if the Department made a mistake in coming to its earlier ruling and can explain what the mistake was and why it was wrong, maybe that is okay as well.  But changing the rules in midstream just because someone feels like it sends the message that the Department can act arbitrarily.  We need our government to keep its word, give adequate notice of any material changes, and rein in any Vaderesque action.

Maintenance of Effort
By Tom Yamachika, President

At the top of my list of pending legislation this week is the “maintenance of effort” bill, House Bill 611 and Senate Bill 815.  What it says is if the appropriated budget of the Department of Education (DOE) drops from one year to the next, the difference in the appropriations is immediately scooped out of general excise tax collections and plopped into a “public education stabilization trust fund” that the Department of Education can then use “to fund any program in the state budget.” 

And that’s not all.  Another provision of the bill directs that if the state reduces the amount appropriated to DOE, then the amount appropriated will automatically change to “the aggregate proportion of the department's annual appropriations from the state general funds over the preceding ten years.”

So how would that work?  Let’s say the DOE is budgeted $2 billion this year, fiscal 2022, which constitutes 13.5% of a total state budget of $15.4 billion.  In general funds, it gets $1.7 billion, which is 21% of $8 billion of the total general funds spent.  Let’s suppose that the bill passes and that in fiscal 2023, the DOE is budgeted $1.9 billion, 12.3% of a total budget of $15.5 billion.  Of general funds, DOE gets $1.5 billion, 19.7% of $7.8 billion total.  The provisions in the bill would sequester $100 million from general excise tax collections and put it into the stabilization fund, and it would unbalance the budget by changing the $1.5 billion general fund appropriation to the 10-year average proportion of the total general fund, perhaps 21% of the $7.8 billion or $1.63 billion.  So, DOE would get $130 million more in general funds than budgeted, and another $100 million would be clawed out of the general excise tax collections.  That $230 million would need to come at the expense of something else.  Or a whole bunch of something elses.

Bills like this one illustrate the creativity and the lengths to which proponents of a particular activity are willing to go to avoid the annual appropriation process.

Appropriation is not supposed to be difficult.  Lawmakers, with the help of our Council on Revenues, figure out how much money we’re expected to collect. They listen as the various executive agencies and departments show them what their respective programs have achieved for the people of Hawaii.  Lawmakers then decide which programs and services are worthy of how much of our hard-earned taxpayer dollars, and off we go for another fiscal year.

This, however, isn’t enough for some people, who are absolutely fixated on securing a “dedicated funding source” for their favorite program or department.  A dedicated funding source usually means setting up a special fund, which is tougher to police using the appropriation process, and a grab on tax revenues before they can be counted with the rest of state realizations during the budgeting processes.  Dedicated funding sources can and do protect inefficient or questionable programs and expenditures.

Legislators argue that the Legislature exercises more than adequate oversight over these special funds even though they aren’t covered in the normal appropriation process.  But how does that explain findings like the State Auditor’s Report No. 20-06, which found more than $75 million in accounts associated with inactive special or revolving funds?  Or Report No. 20-07, which found tens of millions of dollars in special funds that swelled in size over the years, indicating an imbalance between the so-called dedicated funding source and the programs and services it was supposed to fund?  Or Report No. 20-08, which built on Report No. 20-06 and made the bold statement, “More than $483 million in excess moneys may be available to be transferred from 57 special and revolving fund accounts to the General Fund without adversely affecting programs”?

Maintenance of effort is supposed to be earned.  If a program or service efficiently delivers value to the people of Hawaii, then it is worthy of our continued support.   It’s not supposed to be forced by tax grabs, special funds, and other gimmicks.  We need to start recognizing that this “dedicated funding source” rhetoric is taking us down the wrong path.

As seen in the Lahaina News "Letters" February 18-24 

Link to Lahaina News page with Letters ​www.lahainanews.com/opinion/letters-to-editor/2021/02/19/letters-for-the-feb-18-issue/