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The Honolulu Advertiser
Posted on: Monday, February 3, 2003

Act 221: getting rid of abuses

By Tony Clapes
Technology attorney, author and former assistant general counsel for IBM

Tareq Hoque's Jan. 26 Focus commentary focuses on the movie industry deals that have drawn local investment moneys away from tech ventures. But there is even a worse problem: a number of unfortunate and in some cases fraudulent abuses of the Act 221 tax credits within the tech community that are adversely affecting tech investment from out-of-state investors.

Those abuses are giving Act 221 a bad name in the Mainland venture capital community (and in Hawai'i as well). A number of legislators have asked what my solution is.

First, the tax department must get out of the business of giving comfort letters (favorable tax advice), which would force clients that wanted comfort letters to get them from their lawyers. That would force the lawyers to be more conservative in their recommendations. Instead of writing comfort letters, the tax department should promptly write regulations confining the credits to high-tech deals that remain substantive for five years.

Act 221 should therefore be amended by adding a requirement for such regulations, with a time limit for producing them.

Second, movies don't belong in Act 221; the economics of the two sectors is far different.

Whether they should enjoy the same credits they now get is a question as to how badly Hawai'i wants to compete with Mexico, Florida and other states eager to attract movie projects; and it's also a question as to whether we want the limited venture moneys in Hawai'i going into movie production projects or into entrepreneurial startups.

Until those questions are resolved, the solution to abuses is to (a) make two copies of relevant Act 221 provisions; (b) delete all reference to performing arts from one copy; (c) substitute "performing arts" for "high technology" in the other copy; and (d) enact both bills.

These changes would leave both the tech community and the movie industry with the same credits they have now (minus abuses). Then the Legislature and the administration can decide whether Hawai'i is best served by the tax revenue bite.

Since regulations will solve the abuse problem, or at least reduce it to the normal noise level of abuses of tax incentives everywhere, there is no need for other statutory changes, which is good, because there is a real possibility that such changes could be a death knell to the flow of capital to meritorious start-ups.