High-tech tax-incentive bills need work

By John Duchemin
Advertiser Staff Writer

State bills to expand Hawai'i's high-technology tax incentives received a boost yesterday in key House and Senate committees, but government and industry are still far apart on the best structure for the incentives.

Two similar newly amended versions of the "New Economy" incentives coasted through the House Economic Development and Business Concerns Committee and the Senate Economic Development and Technology Committee, nearing the end of a three-month journey to Gov. Ben Cayetano's desk.

But Cayetano administration officials oppose several industry proposals that could prove problematic to the bill's final passage, according to officials including the state tax director.

The proposed incentives, which are designed to give high-technology companies a financial boost, were introduced by former Taxation Director Ray Kamikawa and supported by the Hawai'i Technology Trade Association.

They expand on the last two years of high-tech tax legislation, which already provides benefits including some tax exemptions and the ability to "sell" tax losses to profitable companies.

State officials support the concept -- they introduced a bill in January with many of the same tax credits as the industry version. Government and industry proposals both seek to expand tax relief for holders of stock options and warrants; start a 4-percent tax credit for technology-related building renovations; and start a tax credit system for investment in high-tech companies.

But state officials say the industry's proposals, which have gained wider support in the Legislature, go too far, exposing the government to millions of dollars in lost tax revenue.

"While the state must do what it can to encourage high technology businesses, it must do so in an economically and fiscally sensible manner," said Seiji Naya, director of the Department of Business, Economic Development and Tourism, in Senate testimony last week. Some of the proposals are "poor economic incentives, and could prove very costly to the state," Naya said.

The two sides have come closer together — the bills that passed the House and Senate committees yesterday did not include several proposals opposed by the government. But several other controversial sections remain, including one that would give tax credits to existing Internet service providers — companies including Oceanic, Verizon and Lava.net. This could cost $4 million per year in lost tax revenue, said Marie Y. Okamura, director of taxation, who opposes that measure.

"The original intent of these bills was to provide incentives for new companies, so we are certainly concerned about the impact of some of these measures on the existing revenue base," Okamura said.

Supporters counter that the bills, while aggressive, would give Hawai'i a competitive edge in attracting cutting-edge companies. They say, however, that they are willing to compromise.

"We know that having these bills passed in their purest form may be a lofty ambition, but it's a good strategy to go in aggressively and hope for some sort of results," said Dennis Daley, chief executive officer of infotech consulting firm Axean Pacific and a member of the Hawai'i Technology Trade Association's legislative committee.

For example, industry backers sought 100-percent tax credits for failed investments in high-tech companies. The government said this would encourage banks to make bad loans to questionable companies; the measure was deleted from the latest bills.

Industry backers also proposed a 4-percent credit for all new technology-related construction, not just for renovations. Government officials also succeeded in deleting this measure, saying it would allow tax credits for practically any new construction.

Next up for the similar bills are another round of House and Senate committee votes, then full House and Senate votes. If passed, the bills must be combined for presentation to the governor.

Both sides project the bills will change further.

"Clearly, we're making progress, and hopefully we can work out some of our concerns," Okamura said.

John Duchemin can be reached by calling 525-8062, or by e-mail at jduchemin@honoluluadvertiser.com