Posted on: Friday, April 2, 2004

EDITORIAL
Act 221 numbers still vague, but encouraging

Some of the first numbers on the costs and benefits of the high-tech tax credit law called Act 221 are in, and the verdict is:

Well, you name it. Depending on how one crunches the numbers, Act 221 has been an expensive waste of money for the state or an invaluable tool to stimulate high-tech industries in Hawai'i.

The state has been slow in coming up with a cost-benefit analysis of Act 221. The reasons are understandable.

For starters, much of the analysis must be based on what are effectively voluntary disclosures from companies enjoying the benefits of Act 221. These reports, submitted to the Tax Department, vary widely in thoroughness and accuracy.

And about a third of the companies that should have reported simply failed to do so.

Then there is confusion over terms. What is a "new job" created under Act 221, and what value should be placed on it? How many high-tech companies or jobs would have been created even without the investment stimulated by the Act 221 benefit?

Then when does one begin to measure benefits for the tax "costs" incurred? Some of these start-ups will take years to become fully productive, so is it fair to measure success based on their early years?

Is it a good deal? Yes

All that said, the state Tax Department and the Department of Business, Economic Development and Tourism have made a good-faith effort to determine whether the state is getting a good deal from the law.

While acknowledging that the figures could be flawed, the state concludes that overall the impact of Act 221 has been positive.

We agree.

It appears that between 600 and 800 jobs have been created through the stimulus of Act 221. These jobs are paying around $45,000 a year.

The "cost" to the state is around $112 million in potential Act 221 tax credits (plus an additional $25 million in research tax credits). That's potential; the actual amount of credits claimed thus far is around $38 million.

Economic Development Director Ted Liu estimates each job has, or will, cost the state around $110,000 — a figure higher than a $90,000-per-job figure developed in a Silicon Valley research study.

But it is in the ballpark.

This analysis, of course, looks only at direct jobs. Every successful high-tech company also spins off other work for lawyers, accountants, public relations people and others. The multiplier effect could be substantial.

Still, there are real questions: Will these jobs stick? Will successful start-ups move offshore in search of growth, or will the state be able to come up with creative ways to generate growth capital at home?

That last question may be at least partly resolved by an administration bill that would create a special state-backed fund to stimulate second-stage investment in new companies.

The measure deserves serious consideration by the Legislature. It is not enough to kick-start companies with the modest initial investment money produced under Act 221 and then let them starve for growth capital.

'Fixes' for a better law

In addition, there are several "fixes" to the existing law that would make it more efficient and more transparent.

The first is to shift the reporting aspect of the law from the Department of Taxation, which is uncomfortable in this role, to the Department of Commerce. As proposed by the Senate, this would simply be a mandatory disclosure of company type, product and job potential, which would be certified before an application for Act 221 credits would be accepted.

Note, this is disclosure of the "benefitting" high-tech company, not of the investor who collects the tax credits.

Second, the state should toughen the law so that so-called "drop down" companies no longer benefit for Act 221 investments. There are cases where existing high-tech components of a company have been spun off as a separate entity to qualify for Act 221 money.

This goes against the original intent of the law, which was to simulate new jobs.

Movie, TV deals

And finally, almost everyone agrees that one-shot movie or television production deals that do not set down roots in the Islands should not be allowed to qualify for Act 221 credits.

Movie production is worth encouraging, but not through the Act 221 mechanism.

These, along with several other tweaks and changes to the law (such as capping the multiples of tax credits that can be earned for a single investment), should enable Act 221 to live up to its full potential.

It is clear that Act 221, for all its flaws, has put Hawai'i on the radar of the national high-tech community.

We must not lose that advantage.