Criticism of Act 221 mounting

By Sean Hao
Advertiser Staff Writer

Gov. Linda Lingle renewed her push to rein in Hawai'i's technology tax credits yesterday, this time with support from a few critics of the credits from within the industry.

Lingle is pushing lawmakers to scale back Act 221's research tax credit and delete a provision calling for the law to be interpreted liberally. The governor contends the changes would curb abuses of the act's investment tax credit and free up an additional $55 million over two years. The money would help offset a $118 million deficit projected over the same period.

Revamping Act 221 also could help pay for administration initiatives such as a $75 million, 10-year tax credit for developers of the Ko Olina Resort and an increase in the state's standard income tax deduction.

Among those in the technology industry yesterday supporting the changes were Barry Weinman, a Silicon Valley venture capitalist, and local entrepreneur Tareq Hoque; both have criticized the act in the past. Attorney Greg Kim also joined Lingle in calling for the amendments.

"The problem with the act is it has so many loopholes that need fixing," Weinman said, adding that he believes the controversy surrounding Act 221 is creating a bad image for the state. "People are starting to think of Hawai'i companies as tax shelters."

But Ann Chung, executive director of the Hawai'i Technology Trade Association, said the individuals cited by Lingle yesterday represented a minority among Hawai'i high-tech leaders.

"These are the only three people that anybody knows about that support these changes," she said. "The rest of the industry supports this (act)."

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 state Department of Taxation also has complained that the tax credits in some cases are being used to avoid taxes rather than create jobs.

There is growing concern among state officials over the toll that business incentives such as tax credits are taking on the state general fund. Over the weekend the tax department said companies claimed more in tax refunds than they will pay in corporate income taxes over the first nine months of the current fiscal year because of large refund claims under Act 221.

However, opponents of Lingle's proposed changes contend that other tax credits such as a hotel construction and renovation tax credit also are to blame for the increase in refund claims.

During the act's first year, the 100 percent 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 estimates that a separate Act 221 provision, the 20 percent technology research and development tax credit, cost the state $14 million in revenues that same year.

Act 221 took effect in mid-2001, but the state still doesn't know how many jobs were created by 53 companies that benefited from the act that year. So far job and wage data is only available for 23 companies in 2001, when the state waived $844,000 in individual income taxes for $2.8 million investments made in these companies. Individuals can only claim a credit for a portion of their investment the first year.

In the act's second year, 2002, it's estimated that investors in 20 remaining companies saved an estimated $700,000 in taxes. Overall employment at these companies dropped by 32 positions that year. The tax department assumes the three missing companies either closed or left the state.

While the Senate has passed Lingle's changes, key House members remain opposed to changing the law. Lingle hopes the Legislature will approve the changes this session, in part because of support by those in the industry shown yesterday.

"I'm hopeful in the next couple of days they'll take a look at this," she said.