State examines tax credits

By Sean Hao
Advertiser Staff Writer

•

Tax-credit bills Some of the major tax credits under consideration this session at the state Legislature: A $25 million tax credit for a public safety training facility at Kalaeloa. A maximum $50 million tax credit for a motor sports facility at Kalaeloa. A $75 million tax credit for construction at the Ko Olina Resort. Several different types of tax credits for companies that create jobs. Creation of up to eight "renaissance" zones where eligible businesses and individuals would get relief from general excise and other taxes. A tax credit for large-scale construction projects. An extension of the hotel remodeling and construction tax credit. An extension of the residential construction and remodeling tax credit.

The growing use of tax credits by investors and entrepreneurs establishing new business ventures in Hawai'i is believed to be a key reason why state tax revenue is falling below projections, administration officials say.

The state Department of Taxation has set out to pin down the cost of the credits and is drafting new forms for 2002 state tax returns to determine how much is being claimed and the kinds of new jobs and wages the credits are helping to create.

The debate over costs and benefits of the state's dozen or so business tax incentives is critical as legislators consider the creation of more tax breaks while attempting to balance the state's budget.

To identify the costs of the business incentives, the tax department is crunching data from 2001 returns, focusing first on Act 221, said Deputy Tax Director Kurt Kawafuchi. The analysis should be completed next month, he said.

"Obviously, it's been in the news a lot," Kawafuchi said. "The new administration and the Legislature, we're trying to see how much these credits are costing."

In a bid to improve accountability, the tax department also plans to ask recipients of Act 221's 100 percent rebate on technology investments questions to identify the credits' impact on the state economy. Information gathered from those tax forms would not be available until sometime early next year, Kawafuchi said.

"If we're spending the public's money on tax credits, we need to be able to see how many jobs are these creating and what are the wages," he said. "We want to be able to quantify that."

Controversy surrounding Act 221 resurfaced last week when the Department of Taxation reported that January tax revenue trailed expectations by $32.8 million or 9.6 percent largely because of lower corporate and individual income tax revenue.

Through January, tax revenue was running 1.9 percent above year-ago levels versus a forecast of 6.5 percent growth by the Council on Revenues. If tax revenue growth doesn't improve during the remaining five months of the state's 2003 fiscal year ending June 30, the state will be over its budget by $63 million.

While Gov. Linda Lingle has said it's too early to be alarmed, legislators already are considering tax increases, spending cuts and possibly tapping the Hawai'i Hurricane Relief Fund, a move that Lingle has opposed.

Lowell Kalapa, president of the Tax Foundation of Hawai'i watchdog group, said there's little question that Act 221, as well as other incentives such as the hotel and residential construction and remodeling tax credits, are reducing state tax revenues.

He cites an 8.7 percent or $16 million increase in collections from the state's general excise tax in January, which reflects relatively strong business activity. But at the same time, individual and corporate income tax revenues fell.

Lower income tax revenues coupled with higher general excise tax revenues "means people weren't paying as much income taxes, but they had more disposable income," Kalapa said. "It has to be because they reduced their income taxes" through rebates such as Act 221.

Lack of information on the costs and benefits of tax incentives stems from the state's failure to do its homework before the tax rebates were passed, Kalapa said. That was also a criticism raised in a recent report to the Legislature from the state Tax Review Commission.

The report recommended an overhaul of the tax incentive system for businesses by narrowing the scope and duration of tax incentives, conducting cost-benefit studies before creating new tax breaks and periodically evaluating existing tax incentives meant to spur business investment and job creation.

"You really need to work out these things before you enact the laws," Kalapa said. "It's like that analogy about closing the barn door after the horses have fled."

But Act 221 has strong support from the business community and those who believe the tax credits help promote a diversified economy by encouraging high-technology ventures. They say they welcome a review of its impact because they believe new jobs and businesses are contributing tax revenue to the state.

Excluding credits given to the entertainment industry, use of Act 221 contributed an estimated $25 million to $30 million to high-tech companies, said John Chock, president of the Hawai'i Strategic Development Corp., the state's venture-financing arm.

Chock said he welcomed an analysis of the impact of Act 221 to show how it has been effective in bringing in capital for local start-up technology companies.

"We want to see how well Act 221 worked and if it's beneficial to the state," he said. "If it's not, we'd be open-minded as well."

In addition to tax incentives already on the books, legislators are considering several new tax breaks including several to spur new jobs and another to encourage development of the Ko Olina resort in West O'ahu.

State Rep. Scott Saiki, D-22nd (McCully, Pawa'a), said the state's poor financial picture likely will prevent passing any new tax rebates, including the proposed 10-year, $75 million Ko Olina tax credit being pushed by Lingle.

"I don't think we can create any new tax credits at this point," said Saiki, the House majority leader. "We're going to continue the discussion, but I think it will be difficult."

However, extending the lifetime of existing tax credits may still be possible. To address cost and accountability concerns, Saiki said any new or expanded tax incentives should include two-year sunset provisions, as well as a study of their potential impact on the economy.

Additionally, Saiki said he and other House members have discussed studying changes to Act 221 before next year's legislative session.

"I think it's because of all of the anecdotal stories we've heard of alleged abuses of Act 221," Saiki said.

Act 221 has been criticized for its use by the entertainment industry, which has temporarily pumped money into the local economy while shooting movies and TV episodes but has not created permanent jobs. In 2001, investors in the surfing movie "Blue Crush" received an estimated $18 million in tax rebates, more than all Hawai'i technology companies combined.

Reach Sean Hao at shao@ho noluluadvertiser.com or 525-8093.