House rejects Lingle bid to rein in tech tax credits
By Sean Hao
Advertiser Staff Writer
Gov. Linda Lingle yesterday tried to scale back tax credits for high-tech investment to help balance the state budget but was promptly turned down by House Democrats.
Lingle's plan comes amid increasing concern that the credits, known as Act 221, are being abused by those seeking to avoid paying state income taxes. However, House Democrats and technology industry executives yesterday said limiting the credits would derail attempts to diversify the economy.
Act 221 "has done more to diversify the economy than anything else in the last decade," said House Majority Whip Brian Schatz, D-25th (Makiki, Tantalus). "We feel we can balance the financial plan without using Act 221 as a scapegoat for our problems."
Late yesterday, the House Finance Committee turned down a Lingle administration proposal that would significantly reduce the tax credits for research expenses and limit what type of projects could get tax credits.
During her campaign, Lingle said she was opposed to amending Act 221, but her stance has changed as she attempts to balance the budget without raising taxes or raiding funds. Randy Roth, senior policy adviser to the governor, said the change came after a recent report by the Council on Revenues that said tax collections were lower than expected because of credits such as Act 221.
"(Lingle) very much supports the concept, and she very much wants to continue to subsidize the technology sector," Roth said. "The reality is we need to find $118 million someplace in order to balance the budget."
Act 221 provides a 100 percent, nonrefundable income tax credit for money put into a qualifying technology venture, which has been broadly defined as anything from software development to film and video production. It also gives companies a refundable tax credit on 20 percent of their research costs.
Proponents contend the tax credits are crucial to fostering the growth of the state's fledgling high-tech industry. Critics complain the act is too generous and has been used to finance one-shot, nontechnology ventures including motion pictures, such as the surfing film "Blue Crush." Further, the state does not know how many jobs have been created since the law was created in 2001.
What is clear are the law's costs. Hawai'i investors saved $9.6 million through investment tax credits and companies saved $9.8 million in research tax credits in 2001, the most recent year where figures are available. Administration officials are concerned those figures will swell in future years.
Among the changes Lingle proposed is to allow a company to claim a tax credit only for increased research expenses, rather than for its entire research budget. She also wants to make the research tax credit nonrefundable so that companies could claim the credit only if they're profitable.
Those changes would save the state an estimated $26 million in fiscal 2004, $20 million in fiscal 2005 and $22 million the following year, according to the Department of Taxation.
Even after such alterations, Act 221 would remain the most generous high-tech tax incentive in the United States, Roth said. He discounted complaints that changing Act 221 would turn off potential Hawai'i technology investors.
"We think the message this sends is that there is fiscal discipline in Hawai'i," Roth said.
Schatz disagreed.
"The war is showing that we continue to be very vulnerable to factors that are outside of our control," he said, pointing to a drop in tourism since the start of the U.S.-led war in Iraq. "Especially in difficult times, we need to stay the course."
After the House Finance Committee declined to adopt Lingle's suggestions, Tax Director Kurt Kawafuchi said the administration's emphasis will shift to the Senate. However, the Senate also appears reluctant to change Act 221 this session.
"We're trying not to go there," said Sen. Brian Taniguchi, D-10th (Manoa, McCully), chairman of the Ways and Means Committee.
Alternatives to cutting back on Act 221 tax credits include raising additional money through estate taxes, a general excise tax increase and the use of certain unspecified special funds, Taniguchi said.
The refusal by lawmakers to change Act 221 this session was welcomed by some in the technology industry.
"We feel that all of this is an issue of enforcement," said Ann Chung, executive director of the Hawai'i Technology Trade Association, which has about 600 members. "You don't have to change the act. If someone speeds, then you write them a ticket. You don't get rid of the whole intersection."
Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.
