Posted on: Sunday, February 22, 2004

Act 221 benefits still unclear

By Sean Hao
Advertiser Staff Writer

State lawmakers and Gov. Linda Lingle are moving ahead with plans to amend and extend a high technology tax credit program — estimated to cost the state nearly $50 million in lost tax revenue this fiscal year — for five more years with scant knowledge of the benefits.

A much-anticipated report on the number of jobs, salaries and total investment generated by the Act 221 technology tax credits won't be available anytime soon, according to the state Department of Taxation.

That's because only about 60 percent of people receiving the tax credit completed forms seeking information on how the credits were used, said tax department director Kurt Kawafuchi last week.

The report was originally due out in December, however, "The compliance was modest or mediocre," Kawafuchi said.

And it does not appear the department can deny tax-credit claims to those that did not provide the added information. "It's something I'm going to have to look at administratively." But, "if they're entitled to the claims, I think they're entitled to the claims," Kawafuchi said.

That means any extension of the program this year will be based on the hope, rather than evidence, that the program's unexpectedly high cost is being offset by a boost in the state's economy, said Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i.

"Amazing isn't it," he said. "You could call it blind-faith or blindness — period.

"Somebody should raise their hand and say 'when are you going to do the cost-benefit analysis that the Tax Review Commission asked for?' "

The Tax Review Commission, which is charged with reviewing the state tax structure and determining whether tax policies are sound, is appointed by the governor every five years. In a report last year the commission criticized the Legislature for granting businesses generous tax credits and exemptions without first assessing the cost and benefits.

Sen. Gordon Trimble, R-12th (Waikiki, Ala Moana, Downtown), raised similar concerns during a hearing last week on extending Act 221 beyond its original five-year life span.

"Before we change it, before we extend it, I would really like some good analysis of what it did," he said.

In voting to advance an extension of Act 221, Sen. Carol Fukunaga, D-11th (Makiki, Pawa'a), chairwoman of the Economic Development Committee, said such information would be forthcoming.

"This is a first pass," she told Trimble. "We agree with you wholeheartedly that we need more data."

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.

The state tax department also has expressed 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.

It's known that the program cost the state $21.9 million in tax credits in its first year, 2001. Of that, about $10 million in tax credits claimed for research expenses went to non-high-tech companies including nonprofits, tour operators, travel agencies and financial institutions, according to the tax department. Research credits are available to non-high-tech companies under the act.

In the current fiscal year Act 221 is expected to cost $48.4 million, rising to $76.7 million in fiscal 2005, according to state estimates. A preliminary report on the actual cost to the state of Act 221 in its second year, 2002, should be available within weeks.

In the only analysis of Act 221's benefits done by the state, Hawai'i high-tech wages and jobs at 23 select companies fell in 2001. Critics of that study, including the Hawai'i Technology Trade Association, contend companies benefiting from the program would not immediately boost employment. HTTA maintains that its survey of 15 high-tech companies benefiting from tax credits revealed they expected to create 1,000-plus jobs by 2006.

To alleviate concerns about Act 221 both legislative chambers last week adopted changes to the act 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. The changes must win approval of both houses of the Legislature and Lingle before becoming law.

State officials said they felt comfortable extending the program with those changes.

"There is a lot of good that's being done with the law," said Kawafuchi, the state tax director. "But there have been some taxpayers who have been aggressive, overly aggressive on what they claim.

"I want to make it clear there is a segment of taxpayers that are using this the way it was intended and that's why we support an extension, but with a tightening."

Ted Liu, director of the Department of Business, Economic Development and Tourism, agreed that he has seen anecdotal evidence warranting an extension, particularly if lawmakers adopt a new, tax-credit-backed fund meant to spur venture capital investment statewide. Bills creating a so-called State Private Investment Fund, or SPIF, also are advancing in the Legislature.

"If we merely tighten (Act 221) and SPIF doesn't go forward, we may not be comfortable with an extension," Liu said. "That will put us in a position where people will overuse (Act 221). Having SPIF in place will reduce the reliance on 221."

Apart from its potential benefits, whether the state can afford extending Act 221 may become an issue, if tax collections don't improve. Through December, tax collections rose 1.8 percent, or $29.4 million, from the same time in 2002. However, tax collections will have to grow at a much faster rate to meet the state Council on Revenues projection of a 5.2 percent increase for the fiscal year ending in June.

The council's projections are used by legislators to help craft the state budget.

"We're not out of the fiscal crisis woods just yet," Kalapa said.

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