Posted on: Sunday, May 18, 2003

EDITORIAL
Tax credits hardly a fiscal disaster

Unless new information emerges, it appears that the impact of the high-profile Act 211 high-tech tax credit law has been less disastrous to state finances than many have claimed.

Gov. Linda Lingle, among others, pointed to Act 221 as a key culprit in what looked like a $100 million shortfall in tax collections for this current budget year.

Lingle had pressed hard for changes to the law so that it would be somewhat more difficult to claim tax benefits. The law was intended to jump-start high-technology businesses, but critics say it was being used by enterprises that had little to do with the original intent of the law.

But during a meeting of the state Council on Revenues Friday, it became clear that Act 221 was hardly the major cause of tax shortfalls.

For starters, the council predicted that the state would end up around $73 million short this year, somewhat less than the threatened $100 million. About half of that was due to a completely unrelated change to the tax law, which lowers the amount people have to pay in anticipated tax.

And the other half was attributed not just to Act 221 but to the impact of an entire slate of tax credit laws. So it is clear that Act 221, by itself, is hardly responsible for sending the state into the fiscal pit.

Looking forward, however, it is clear that the high-technology credit will "cost" the state increasing numbers of dollars. By the year 2005, the council said, Act 221 could produce up to $76.7 million in credits.

That could lead to pressure to revise, repeal or restructure Act 221. But the state should proceed carefully here.

It makes little sense to pull back from Act 221 simply to deal with short-term fiscal problems. The idea of this law is to encourage high-tech companies to put down roots and build an economic base.

That kind of growth takes time. Rather than treating the cost of Act 221 as a short-term loss, it should be treated as a long-term investment.

Then too, some of the "losses" attributed to Act 221 might be illusory. That is, they are credits claimed by businesses that might not have even existed were it not for Act 221.

And yes, sharp tax lawyers might be able to find places to gain benefits that were not intended by the people who wrote the law. The cure for that is to make measured adjustment rather than throwing out the entire idea because of an immediate budget crunch.

For years, Hawai'i has suffered a reputation, deserved or not, as a place that is hostile to business. Act 221, warts and all, has begun to turn that reputation around, at least in the high-tech and venture capital fields.

In the depths of our economic downturn, the Legislature rushed through a long list of tax credits designed to get the economy moving again.

The job now, as the Tax Department already recognizes, is to give each and every tax credit a through and careful review, to determine if the costs are worth the benefits.

That's a worthwhile exercise. But the study must be long-term. It makes little sense to judge these credits simply on the basis of their impact on this year's balance sheet.