State quantifies benefit of Act 221 tax credits

By Sean Hao
Advertiser Staff Writer

The state defended the contentious Act 221 tax credits yesterday, saying the program had resulted in an estimated 600 to 800 new technology jobs in 2002, while adding that the figures could be flawed.

"The data has holes in it," said Ted Liu, director of the Department of Business, Economic Development and Tourism, who released the numbers. Although not perfect, "we thought we were within the range of credibility," Liu said.

The job count is based on unverified figures reported voluntarily by Act 221 businesses plus an analysis of job growth in key technology-related industries. Comparing the two sources, Liu said Act 221 created between 600 jobs with an average salary of $45,995 and 801 jobs paying $48,180.

The job numbers are key to the debate over whether the tax credits have helped diversify the state's economy, as intended, or simply provided a windfall for tax-dodging investors.

The law adopted in 2001 will expire next year unless lawmakers extend it.

The Legislature is considering a five-year extension with changes that would tighten eligibility, require disclosure of the identities of companies benefiting from the credits and give the state Taxation Department more authority and resources to police the tax break.

"It's important that we tighten up the eligibility requirements, but clearly the program is working to create high-paying jobs," said state Rep. Brian Schatz, D-25th (Makiki, Tantalus), chairman of the House Economic Development and Business Concerns Committee. "The important thing is to move forward in a way that increases the efficiency of the act."

So far, Act 221 has generated $161 million in tax-credit claims, although the actual cost in the first two years was about $57 million, because the credits are spread over five years.

Based on Liu's estimate, each job created under Act 221 cost the state between $105,000 and $140,000. If those jobs are maintained over a five-year period, it's possible the revenue lost could be recouped in taxes and other economic activity, Liu said. Yet, the cost is still higher than the estimated $90,000 of investment needed to create one job in California's Silicon Valley, he added.

Casting further doubt on the accuracy of the new-job estimate was the possibility that some of the positions were jobs reclassified as new when companies spun off technology departments to qualify for the credits, said Kurt Kawafuchi, director for the Department of Taxation.

"I think some of it is ... where they're creating a new job where it's the same person at the same desk doing the same job," he said.

If 600 to 800 new technology jobs were indeed created in 2002, weighing the economic impact of those jobs against their cost is a difficult proposition, said Leroy Laney, an economics professor at Hawai'i Pacific University and a First Hawaiian Bank consultant.

"You want to break even," Laney said. "And it's not clear that we are breaking even on it. But you have to take a long-term perspective on this."

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