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The Honolulu Advertiser
Posted on: Tuesday, March 25, 2003

High-tech companies defend Act 221 credits

By Sean Hao
Advertiser Staff Writer

An industry trade group hoping to head off legislative changes to the controversial Act 221 tax credit law says high-tech companies benefitting from the act plan to create more than 1,000 jobs in three years.

The act generated about $46 million in tax credits for businesses in its first year, according to the state tax department. However, officials do not know how many jobs were created by the 100 percent tax credit or the wages paid for the jobs.

Some critics of Act 221 contend the act is too generous, lacks accountability and is benefitting non-high-tech businesses that don't create long-term jobs.

State officials do not know how much of the $46 million in credits went to technology companies. Some of it helped finance Hollywood films such as the surf movie "Blue Crush."

In an attempt to counter the criticism, 15 high-tech companies helped by the tax credits say they expect to create the thousand-plus jobs by 2006. Most of those jobs would pay more than $50,000 a year in salary, said Ann Chung, executive director of the Hawai'i Technology Trade Association.

"It's going to take a little while to see, but if (state officials) continue to support it, these are the kinds of numbers we can expect," she said.

Although $46 million in tax credits were created during Act 221's first year, there was an actual reduction in state revenues of only $9.6 million because the credits must be claimed over a five-year period.

Controversy about the cost and benefits of Act 221 are creating concerns among technology companies and investors that the state will change or abandon the tax credit, Chung said. However, key legislators and Gov. Lingle so far appear to be in no rush to alter Act 221, which expires in 2005.

Among the companies surveyed by the association included:

• Hoana Medical, which expects to grow from 11 jobs to 141 jobs in less than three years.

• Hoku Scientific, which plans to increase its workforce from 10 people to 60 people by 2006.

• Landmark Networks, which projects increasing employment from eight to 58 jobs by 2006.

Even if the projected jobs materialize, the cost to the state is too great, said University of Hawai'i economist Sumner La Croix.

Facing mounting concerns about Act 221, the state tax department recently issued tight guidelines that govern how Hawai'i's high-technology investment tax credit can be used. However, La Croix said the stricter rules won't prevent people from trying to take unfair advantage of the law.

"One-hundred percent tax credits encourage scheming to use the tax credits to avoid paying taxes," he said.

One reason Act 221 has come under fire is it is one of several tax credits that may be contributing to the state's budget shortfall.

Theoretically, the tax losses from business tax incentives should be offset by additional revenues from the creation of new jobs and income.

But because of the expensive and time-consuming nature of high-tech research, offsetting tax revenue may take several years to appear, said Ted Liu, director of the state Department of Business, Economic Development and Tourism.

"Short-term there may be a question, but in the long-term, if we stay the course, it does pay off," he said.

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