HI. TECH
Hawai'i Technology Trade Association should re-examine stance on Act 221

By John Duchemin
Advertiser Staff Writer

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But as is often the case, the truth is more complex. Lingle doesn't disagree with the whole of high-tech Hawai'i; she is at odds only with about half of it, plus at least a few of the investors who have generated tens of millions of dollars of state tax benefits through the use of Act 221.

Lingle not only wants to increase the Tax Department's oversight of the incentives, which allow for a half-dozen forms of tax benefits to high-tech companies and their investors, but also seeks to amend the act with language to remove several perceived loopholes. Most notably, she wants to strike language that requires tax officials to interpret the act, which allows a half-dozen forms of tax credits, as liberally as possible.

This is a major shift for the governor, who in an October campaign debate vowed to protect Act 221 from changes proposed by Democratic lawmakers. The act, Lingle argued then, "should be allowed to run its course," because changing the law could scare away potential investors.

Lingle's new stance, however, is that Act 221 in current form is far too loose and vulnerable to abuse. Her argument comes after months of public controversy over the act and its use by projects, including movie productions, which some viewed less as high-tech economic development than as elaborate tax shelters.

Also figuring in the harder Lingle line are lukewarm reports by the Tax Department, which says that, yes, abuses seem to have occurred, and the Council on Revenues, which blamed the act in part for fueling a state deficit projected to rise to $120 million over the next two fiscal years.

The Tax Department says Lingle's proposed changes would save the state $68 million in tax revenues between 2004 and 2006. "The reality is we need to find $118 million someplace in order to balance the budget," said Lingle policy adviser Randy Roth.

Lingle's stance on Act 221 has upset the Hawai'i Technology Trade Association. HTTA, a trade organization representing not only technology companies but dozens of the law firms, investing firms and accountants who have benefited from Act 221, has long argued that the law needs to be kept intact in current form. Its executive director, Ann Chung, says in an e-mail that Lingle has placed "Hawai'i's high-tech future in serious jeopardy" by attempting to rein in the act.

HTTA's position on Act 221, however, is hardly representative of the entire technology community, which has been sharply split on the issues. A significant faction of entrepreneurs and venture capitalists has long insisted that Act 221, despite its stimulative effect, has the potential to harm Hawai'i's reputation unless misuses are stamped out.

With the technology community so divided on Act 221, Lingle has been able to propose changes to the act and still argue that she has acted in the interests of high-tech Hawai'i. Yesterday, she repeated her administration's position that even after the changes she recommends are made, Act 221 will continue to be the most generous tax credit in the nation.

Whatever happens, the conflict has shown that HTTA has some work to do if it plans to remain the main voice of the high-tech community.

The group claims to be a nonpartisan umbrella organization representing hundreds of technology employers. But the HTTA has taken sides on Act 221, and in such a way that it's disagreeing publicly with a governor it was careful to court after the election.

The group would be wise to examine the arguments for and against changes to Act 221, and figure out why Lingle was so willing to change her mind after only four months in office.

Reach John Duchemin at jduchemin@honoluluadvertiser.com or at 525-8062.