With about $100 million in direct spending per year, TV shows and movies play only a bit part in Hawai'i's $50 billion economy. However, even that small role may diminish as an increasing number of states and foreign countries vie for Hollywood screen time.

They're getting that business not by offering blue skies and white sand beaches, but with cost-cutting incentives ranging from tax breaks to low-interest loans and direct equity investments. Movie industry advocates say Hawai'i's tax breaks are not generous enough or are too difficult to use, sending production companies elsewhere.

ABC's "Lost" is shot in Hawai'i, but there are no major motion pictures filming or scheduled to film here, according to the Hawai'i Film Office.

"It's now all about the incentives," said state Film Commissioner Donne Dawson. "Everybody is sort of gravitating to these jurisdictions that are offering the most incentives." Dawson and other state and industry officials are pushing for a revamp of Hawai'i production tax breaks to make them more attractive.

Comparing incentives offered by various states and foreign countries is difficult because they are structured differently.

Georgia, for example, offers movies a 9 percent tax credit on production expenses, and Florida offers 15 percent. Hawai'i's 4 percent production tax credit may seem small, but it is only one of the state's incentives. Hawai'i also offers a 100 percent investor tax credit, an exemption from the 7.25 percent hotel room tax and the use of its Diamond Head film studio to the industry at below-market rates.

Dawson, who is lobbying to revamp Hawai'i production tax breaks, says the present incentives leave the state at a disadvantage. According to Dawson, several projects considered shooting in Hawai'i but went elsewhere, in part because of the better incentives. They include Adam Sandler's "Longest Yard," which filmed in New Mexico.

New Mexico offers interest-free loans and a 25 percent tax rebate.

INCENTIVE DEBATE

Whether it makes sense for Hawai'i to chase the film industry with better incentives is debatable. Paul Brewbaker, chief economist for Bank of Hawaii, questions whether the state needs to stimulate a specific industry in an economy that's already booming and has the lowest unemployment rate in the nation.

"It's a different story when you have 6 percent unemployment from the situation (today) when there's 2.5 percent unemployment," Brewbaker said. By giving out tax credits, "you can change the type of economic activity, but that's all you can do if everybody is working.

"The deck is already full of chairs, you're just rearranging chairs. You're not adding deck chairs."

Additionally, it's unclear that pumping money into films generates more business for Hawai'i than subsidizing other industries, Brewbaker said.

Proponents of the film tax credits say there is value beyond the jobs they create. Movie productions generate global exposure for Hawai'i, which benefits the tourism industry.

As for the more direct benefits, the state gained 3,500 jobs and $150 million in wages from the $100 million spent on movie productions last year, according to Lawrence Boyd, a labor economist for the University of Hawai'i's Center for Labor Education and Research.

The state hands out an estimated $28 million in film tax credits each year.

PROPOSED TAX BREAKS

Dawson said the state doesn't need to offer more money but should simplify the way the tax credits are structured. She supports Senate Bill 2570, which would combine the various film incentives into a larger production tax credit. The bill was in conference committee last week, and Gov. Linda Lingle supports the measure.

If it's adopted, Hawai'i's 4 percent production tax credit would rise to 15 percent on O'ahu and 20 percent on the Neighbor Islands. The amount of credits available would be capped at $8 million per production.

At the same time, the hotel room tax exemption would go away and the film industry's use of tax credits for investors would decline, Dawson said.

Even though the proposed changes aren't supposed to cost the state money, Dawson said they would result in more movie business for the state. That's because it will be easier for shows to qualify for production tax credits than for investment tax credits.

The investment tax credit program, known as Act 221/215, was primarily designed to benefit technology businesses.

The proposed tax breaks should make Hawai'i competitive with the rest of the nation, said Chico Powell, a local independent film producer. The investment tax credit is suited to small, independent films in need of money, while the production incentives are suited to large productions looking to shave costs, he said.

"We really do need to be competitive" said Powell, who also works as an assistant production accountant on "Lost."

Hawai'i cannot count on its good looks alone to attract business, because computers make it possible to shoot a tropical scene anywhere, he added.

"This is a business of make-believe, after all," Powell said. "We can create everything, with the right amount of money."

'HANDING OUT CANDY'

While state, movie and labor officials support increasing the production tax credits, others complain they're costly, unneeded and unfair to taxpayers not fortunate enough to be in such a chosen industry. In addition, the subsidies sometimes create only temporary jobs, said Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i.

"You're never going to have permanent jobs if you're depending on the whim of viewers for the success or failure of a TV show," Kalapa said.

The Hawai'i-based television shows "North Shore" and "Hawaii" were both canceled shortly after they aired in 2004. Even though the jobs generated by "North Shore" and "Hawaii" are long gone, investors in the shows could be getting tax credits for several years because the investment credits must be claimed over five years.

In other situations, the credits benefit existing rather than new productions, Kalapa said.

"Are we handing out credits to productions that are already here?" asked Kalapa. "Are we handing out candy to good kids?"

Last year, lawmakers failed to push through a bigger package of tax breaks for movie and television production, despite threats that "Lost," which has become a hit for ABC, might leave Hawai'i. "Lost" continues to be shot in Hawai'i even though the bigger tax breaks were not passed.

Film Commissioner Dawson said she has no reason to think "Lost" may leave Hawai'i for a location with better incentives, "but there are no guarantees in this business."

Dawson reminds the opponents of film incentives of the broad benefits of productions in the state.

In addition to actors and other direct employees, film and TV productions affect the lives of those in a host of industries ranging from caterers and contractors to local merchants such as City Mill, which has sold set hardware to productions such as "Lost" and "Windtalkers."

"Obviously, our bread and butter is serving the people of Hawai'i, but any incremental increase in the business (from movies) is nice to have," said Steven Ai, president and chief executive for hardware chain City Mill Co. Ltd.

This is the third consecutive year the industry has pushed to boost the level of production tax credits. Whether state officials pass the bill remains to be seen, though Dawson said she's optimistic.

"I feel really fairly good about it, but I think it's a culmination of three years of educating people about the industry," she said.

Without an increase in the production tax credit, the industry's impact on Hawai'i's economy will decline, Dawson said. Last year, television and film production spending statewide fell by nearly 40 percent to an estimated $100 million. Much of that decline was a result of an unusually strong 2004, which among other projects included the short-lived "Hawaii" and "North Shore" productions.

Reach Sean Hao at shao@honoluluadvertiser.com.