Refunds exceed taxes for Hawai'i corporations

By James Gonser
Advertiser Staff Writer

State tax officials said yesterday that new tax revenue numbers show corporations claimed more in tax refunds than they will pay in income taxes over the first nine months of the fiscal year and that tax credits associated with Act 221 are to blame.

However, state House members say Gov. Linda Lingle is taking the tax revenue numbers out of context, and the act can help diversify Hawai'i's economy if given sufficient time.

Kurt Kawafuchi, director of the state Department of Taxation, said that taxes by all Hawai'i corporations show an estimated $26.4 million in income tax receipts but they are claiming $40.8 million in refunds, a reduction of 109 percent in income from the previous year.

"The implication of these new numbers are huge," Kawafuchi said yesterday. "We now know with some certainty that various tax credits have proven to be far more generous than anyone ever dreamed would be the case. We are going to be in a bad way if this continues."

Act 221 gives tax credits to companies that invest in high-tech and research. The Lingle administration has been lobbying for changes in the act to close "loopholes," saying the eligibility requirements are too broad and subject to abuse.

Senate leaders have supported the changes, but House Speaker Calvin Say said last week the House has no intention of changing the act, which needs to be given a chance to work. House and Senate conferees are working to reconcile differences in their respective drafts of the $7.6 billion two-year general fund operating budget.

Rep. Brian Schatz, D-25th (Makiki, Tantalus), said yesterday that the administration continually changes the numbers it uses to justify its budget position and these latest figures are being taken out of context.

"The appropriate way to deal with Act 221 and other tax policy numbers is to all sit down together and deliberate," said Schatz, a majority whip. "Instead, the governor fires volleys through the media and that is not serving anybody."

Schatz said the act is intended to help diversify the state's economy but the administration is determined to change it.

"We don't think it is the right way to go," Schatz. "We will have a balanced budget, we won't raise taxes and we won't reverse our direction on diversifying the economy."

Schatz said if the act is changed now, it could chase off potential investors wanting to spend money on high-tech and research in Hawai'i.

"The economy has had difficulty since 9/11, and tax revenues have dropped as a result of that," Schatz said. "Now the technology industry and our diversification efforts have become an easy target, but you could just as easily look at any increased costs or reduced revenue and blame that for our problems."

Kawafuchi said dropping tax revenues in a strong economy appear to be the result of the tax credits because income taxes withheld from individuals' wages increased 1.9 percent despite a 5 percent rate reduction that took effect Jan. 1, 2002, and excise tax revenues were up by more than 10 percent.

The department considers the excise tax the single best indicator of economic activity in the state.

Kawafuchi said the reduced tax-revenue numbers speak for themselves.

"It means there has been a severe drop-off in what corporations are paying in estimated tax payments versus what they are claiming in refunds. It is a negative now," he said. "The House needs to sit down and look at Act 221. We need to fine tune and tighten it. If we wait another year, it could be another $30 million we spend on it."

Reach James Gonser at jgonser@honoluluadvertiser.com or 535-2431.