Posted on: Monday, March 24, 2003

EDITORIAL
High-tech Act 221 is in need of fine-tuning

The fact that the state Tax Department has decided to take a closer look at tax credit claims filed under the high-profile Act 221 should not diminish the underlying value of the law.

Act 221 was designed to offer a tax "carrot," if you will, to high-tech companies willing to set up shop and put down roots in Hawai'i. Because it was liberally written and liberally interpreted, some critics say the law has been misused.

Companies have applied for, and received, tax benefits for activities that were not envisioned under the original law.

One example often cited was the tax credits claimed by the producers of the film "Blue Crush."

While the film is generally seen as a success and has produced a spin-off television series set in the Islands, the project did not fit the original concept of Act 221. That's because once production was finished, the film company pulled up stakes and went back to the Mainland.

Little, if any, permanent "high-tech" economic infrastructure was left behind.

Tax officials say there have been a variety of other claims under Act 221 that appear to be designed primarily to save taxes rather than start a new business.

The cure for these problems, obviously, is not to throw out Act 221 and its fundamental purpose. Rather, it is to fine-tune the legislation so it better meets its original purpose and then do a more focused job of auditing claims under the act.

Clearly, that's what the state Tax Department has in mind. But beyond tightening the rules, lawmakers should strengthen the law by setting very specific goals for tax credits and creating a mechanism that measures results in a direct way.

One thing to watch carefully is the way in which Act 221 is subjected to a cost-benefit analysis. While it is true that Act 221 generated some $46 million in tax credits during its first year, that does not necessarily translate into a $46 million tax "loss" to the state.

Some, perhaps much, of the business that claimed those credits might not have existed without the lure of Act 221. And while the credits wiped out some tax obligation, other aspects of the business (payroll, for instance) were generating tax income.

A sophisticated and rather long-range analysis of the benefits and costs of this law is called for.

And as for movies and television production, it may be proper to move them out from under Act 221. But that does not mean that film production isn't an industry worth encouraging on its own merits through tax credits or other concessions.