Posted on: Friday, February 20, 2004

Act 221 extension advances

By Sean Hao
Advertiser Staff Writer

State lawmakers pushed forward a five-year extension for Act 221 technology industry tax credits yesterday without including any requirement to disclose the names of beneficiaries.

Act 221 was adopted in 2001 to aid the state's fledgling technology industry. The act has been the source of considerable controversy amid allegations the credits are being misused by some and costing the state more than it can afford.

Verifying the benefits of the program is difficult because much of the information — including identities of the companies involved, their investors and the amount of credits claimed — remain confidential. Yet companies and individuals "are getting a tax benefit that nobody else is getting and it's being paid for by other people," said Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i.

Disclosure would help solve problems Hawai'i faces over accountability of Act 221, Kalapa said, adding that no one would be forced to participate.

"If you don't want to comply, then don't make the investment," he said.

Some House Democrats expressed support earlier this month for requiring the disclosure of names, but when a House committee adopted the Act 221 extension yesterday it left that out. The House bill did provide for some additional disclosure, including the type of companies claiming the credits, size of credits claimed by companies and investors and the nature of the work being financed.

A Senate version that also advanced yesterday included no new disclosure requirements.

Disclosure requirements wouldn't be unprecedented in Hawai'i. A tax credit given to developers of an aquarium at the Ko Olina Resort & Marina last year included a provision that the identities of those claiming up to $75 million in tax credits as well as the amount of credits claimed be made public.

Additionally, 10 states nationwide require companies receiving tax breaks to disclose how much money they save, according to Good Jobs First, an independent group that tracks economic development incentives. Hawai'i isn't on that list, though at least one member of Gov. Linda Lingle's administration supports the idea of added disclosure.

"What we need to find out (and) what would be reasonable to know is who are the companies that are benefiting from 221 (and) did their employment go up," said Ted Liu, director for the state Department of Business, Economic Development and Tourism.

The program cost the state an estimated $21.9 million in 2001 — its first year — and is expected to cost $48.4 million this fiscal year before rising to $76.7 million in fiscal 2005, according to state estimates.

Still, the number of jobs created under the program remains largely unknown and it is unclear how the new disclosure requirements adopted in the House would help. The state tax department already is allowed to publically disclose aggregate information on Act 221's cost and benefits, though it has yet to do so.

Both legislative chambers yesterday adopted other changes to the act that was set to expire at the end of 2005, including restricting the research credit portion of the program to high-tech companies, making the application of the act less liberal and providing guidance meant to curtail investment tax credit returns that in some cases have been higher than intended. In the House version the changes would take effect in mid-2005, while the Senate version would take effect this year. Both bills face further hearings.

Rep. Brian Schatz, D-25th (Makiki, Tantalus), chairman of the economic development committee, said those fixes to Act 221 make public disclosure of companies benefiting from the credits unnecessary. Schatz also said companies and investors are leery of disclosing details of their deals.

"I just don't see the need to know the name. I need to know the numbers," he said. "I think there are some legitimate reasons that certain investors wouldn't want their names out there and it's not simply a matter of them wanting to hide."

While several high-tech companies have voluntarily disclosed how much they've raised via Act 221, most companies have not. While Act 221 has been credited with attracting capital to the state, an unintended consequence has been its use by investors who wrote off millions of dollars pumped into projects that did not create permanent jobs, such as movie and TV productions.

There is also concern that some credits were claimed by noneligible, tax-exempt organizations, that some research spending figures were inflated and that some investments were specifically designed to avoid state taxes.

Making the identities of companies benefiting from Act 221 would dispel some of those concerns while making it easier to assess the program's benefits, such as the number of jobs and wages created, said Liu, the state economic director.

Deciding on the level of disclosure needed for Act 221 will require a balance between the public's right to know how its money is spent, versus the privacy needs of companies and individuals benefiting from the tax credits, said Kurt Kawafuchi, director for the Department of Taxation.

"I think the people who want more transparency feel that it would keep people in check to know that it would become public," he said. "And it's also a lot of taxpayer dollars that we're talking about, so there's a good argument that they should be accountable to the public."

On the other hand, "companies who are doing cutting-edge research, they're afraid of their ideas leaking out and a big company stealing their idea," Kawafuchi said. "The other part is we don't want to kill the investment community. You know some of the wealthy people don't want it to be known that they're investing a lot of money into these types of companies, so I think (we need) some sort of middle ground."

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