Study finds tech growth slowed
By Sean Hao
Advertiser Staff Writer
Hawai'i's fledgling high-tech sector grew at a slower rate in 2001 — the first year of the state-granted Act 221 tax credits to encourage investment and research in technology, according to information released by the office of Gov. Linda Lingle yesterday.
The data, compiled by the Department of Taxation and the Department of Labor and Industrial Relations, is the first measure of the effectiveness of the tax credits that have been criticized for draining tax revenues.
The growth in the technology industry started to slow in 2001 at the same time the state vastly increased the size of high-tech tax credits from 10 percent to 100 percent of an investment in a technology company, the state said. In the same year, the technology bubble burst, causing stock prices to plunge and the loss of tens of thousands of jobs nationwide.
During the act's first year, the technology investment credit cost the state $9.6 million and created total potential tax losses of $46 million, which is equal to the amount investors pumped into the industry.
That $46 million in tax credits is nearly three times more than the state projected. The tax department also now estimates that a separate 20 percent technology research and development tax credit cost the state $14 million in revenues that same year.
Despite the infusion of investment dollars, Hawai'i high-tech wages and jobs at 23 select companies fell in 2001, according to the state's study.
"What it tells me is we increased the size of the tax credits by 10 times for a decline in the percentage growth of the industry," said Kurt Kawafuchi, tax department director. "We expected it to be more because there's a lot of money coming into the sector."
The new figures were released as Lingle renewed her push to change Act 221 by limiting the tax credits to those who increase their spending on research and development and removing language requiring the tax department to interpret the act liberally.
Concern about Act 221 and other state income tax credits has grown in recent weeks after the Council on Revenues blamed the incentives rather than the economy for lower-than-expected tax collections in the current fiscal year.
The reduced forecast forced lawmakers to revise their budget plans and consider raising money through estate taxes, a general excise tax increase and use of certain special funds.
Lingle opposed changing Act 221 during her gubernatorial campaign, then changed positions because of the state's tough financial position, which includes a $118 million budget shortfall for 2004 and 2005.
Changing the law would free up $55 million in those two fiscal years, she told the Hawai'i Economic Association yesterday. She also cited several examples of what she said was misuse spurred on by a cottage industry of accountants, consultants and lawyers.
While the Senate has passed Lingle's changes, key House members remain opposed to changing the law.
Lawmakers "don't need to be worrying about saving face on this issue," Lingle said. "They need to worry about saving Act 221."
Proponents argue that the tax credits are crucial to fostering the growth of the state's high-tech industry. Critics complain the act is too generous and has been used to finance one-shot, nontechnology ventures including motion pictures such as the surfing film "Blue Crush."
Until yesterday, the state could not say how many jobs have been created under the law. The Hawai'i Technology Trade Association, in support of retaining Act 221, recently released a survey of 15 high-tech companies benefiting from tax credits that said they expected to create 1,000-plus jobs by 2006.
In analyzing the impact of Act 221, the tax department looked at changes in high-tech jobs state-wide and at 23 specific high-tech companies. Between 1999 and 2000 the number of technology jobs overall grew 4.8 percent to 13,016, then slowed to 4.1 percent in 2001 when 537 jobs were created.
At the 23 companies benefiting from credits the growth rate slowed from 75.8 percent and 116 new jobs in 2000 to 11.2 percent growth in 2001 when only 30 jobs were created. In 2002, these companies reduced their workforce by 10.7 percent or 32 jobs.
Wage growth for technology jobs statewide also fell from 11.1 percent in 2000 when salaries totaled $646.2 million to 6.5 percent in 2001. Wage growth also slowed at the 23 companies studied between 2001 and 2002.
Philip Bossert, chief executive for the High Tech Development Corp., said he was not surprised by the lack of job and wage growth given the technology industry meltdown that started in 2001.
Bossert said he supports amending Act 221 but only after 2005 when the law is due to expire. Changing the law now would send mixed signals to investors, he said.
"I would argue to be patient," he said. "I think the impact of what is going to happen as a result of the tax credits has yet to be seen."
Brian Schatz, D-25th (Makiki, Tantalus), also attributed the absence of significant job and wage growth to a slowdown in the industry. He remains opposed to changing Act 221 this session, but offered no specific revenue-generating alternatives.
"The central issue is to stay the course in diversifying the economy," Schatz said.
Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.
