Technology tax break totals $46 million

By Sean Hao
Advertiser Staff Writer

Hawai'i businesses and investors claimed an estimated $46 million in tax breaks under the state's technology investment tax credit in its first year, nearly three times as much as had been estimated, according to preliminary figures released yesterday.

The tax credit is spread over five years, meaning that there was an actual reduction of $9.6 million in tax revenue in 2001, the first year of the program.

The program, known as Act 221, provides a 100 percent credit for money put into a qualifying technology venture, which has been broadly defined as anything from software development to film and video production. The state had previously estimated that about $16 million in tax credits would be claimed in the first year.

Separately, the Department of Taxation said companies saved another $9.8 million on their taxes under Act 221's research credit in 2001, the most recent year for which figures were available.

Act 221 has strong support from the business community, the Lingle administration and those who believe the tax credits help promote a diversified economy by encouraging high-technology ventures to establish themselves in Hawai'i and create new jobs. Critics say the definition of qualifying businesses is too broad and that the potential loss in tax revenue could be huge.

"That's just the tip of the iceberg," said Lowell Kalapa, president of the Tax Foundation of Hawai'i. "It's going to get bigger and bigger as more people figure out how to use it."

If investments under Act 221 continue at the same pace as in 2001, the state could see tax revenue reduced by $230 million over five years, Kalapa said. Figures on the use of Act 221 credits for the 2002 tax year won't be available until about this time next year.

In 2001, 46 businesses received Act 221 credits, according to the Department of Taxation. Among those was medical imaging device maker Hoana Technologies.

Ian Kitajima, marketing manager for Hoana's founding company, Oceanit, said the tax credits were crucial to Hoana's ability to raise $1.7 million from investors in 2001 and $2.5 million last year.

"It's been very, very important," he said. "Without it, I don't know how we would have gotten to this point in terms of momentum created here in Hawai'i."

The financial impact of tax credits are be being scrutinized by legislators and administration officials who are trying to decide whether to revise Act 221 and create additional business tax incentives, or to narrow the kinds of investments that qualify. State officials have said they are concerned that tax revenue is falling even as spending by tourists and local consumers remains fairly robust.

Overall tax collections fell slightly to $3.05 billion in the state fiscal year ended June 30, 2002, versus from $3.15 billion in 2001.

Kurt Kawafuchi, state deputy tax director, said fostering the state's fledgling technology industry is a good idea, but cautioned that based on Act 221's first year, "it could end up costing quite a bit."

"But it's too early to jump to conclusions," he said.

In a bid to improve accountability and to track the number of jobs and amount of wages created by the tax credit, the tax department plans to ask recipients of the investment tax credit to fill out special forms with their 2002 tax returns. Those forms, which are still being drafted, will be sent to those who have already filed their state tax returns, Kawafuchi said.

According to the report, the amount of tax credits claimed increased 20 percent in 2001, totaling $111.8 million. Among the major credits included:

• $7.4 million claimed under the hotel construction and renovation tax credit.
• $11.3 million claimed under the residential construction and renovation tax credit.
• $23 million claimed by businesses under the capital goods general excise tax credit.

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