Tax credit extended 5 years

By Sean Hao
Advertiser Staff Writer

Gov. Linda Lingle signed into law a five-year extension of the state's controversial technology tax credits yesterday — a move technology industry advocates hope will result in a new reputation for the program.

Act 221, which now becomes Act 215, has been criticized since it was created in 2001 for being overly generous, failing to produce tangible economic benefits, being shrouded in secrecy and, in some cases, creating only temporary jobs.

The credits were intended to encourage investment in technology-related companies and led to the creation of 600 technology jobs in 2002, according to state estimates.

The new law, among other changes, removes a provision that the act be "liberally" construed by tax officials and adds restrictions limiting research credits to technology companies. It also includes new guidelines on the level of investment credits that can be claimed. That, along with the knowledge the credits will be available through 2010 should put the program on the right track, said Ann Chung, executive director of the Hawaii Technology Trade Association.

"One of the things we were trying to do is get a five-year extension," she said. "We wanted to send a message to investors that all the controversy surrounding this act should be gone now."

Lingle signed the tax-credit extension but expressed disappointment that lawmakers delayed for at least a year a companion program that would create a state-backed fund to provide venture capital for companies. Lingle said delaying the new fund could force some local companies to move to the Mainland in search of investments.

"Stopping short of implementing the State Private Investment Fund is another example of a piece of legislation that misleads our citizens by purporting to do something, when in reality, it does little or nothing," she said.

State Rep. Brian Schatz, D-25th (Makiki, Tantalus), chairman of the House Economic Development and Business Concerns Committee, said there was wide support for the fund, but continued debate was needed because of its innovative nature.

"There is agreement that this would help to diversify the economy, but when you look at borrowing $50 million to $100 million, it's creative and it's entrepreneurial, but it's not the kind of thing government borrows money for," he said. "Because it's so different and because we're obligating taxpayer money, it does make sense to apply additional scrutiny to it."

Lingle said she was satisfied with the tax-credit portion of the new law. The stricter requirements would focus the program on creating jobs and investment opportunities for tech-based companies by filtering out companies that either don't quality for the credits or don't bring new jobs to Hawai'i, she said. The state lost $30 million in tax revenue because of those "loopholes," she said.

The tighter qualifications for technology tax credits take effect this year and will save the state an estimated $65.4 million over the next two years, according to the Department of Taxation. However, the tax department has refused to provide an estimate of the program's total cost.

Going forward, state tax incentives including the new Act 215 may need more fine-tuning, particularly when it comes to providing the public an accounting of the costs and benefits, said Ted Liu, director for the Department of Business, Economic Development and Tourism.

"We may find over the next six months that we may need to improve the improvements we made," he said. "Maybe one area where we may not have done as much as we could is in disclosure or information flow."

Verifying the benefits of the program is difficult because the identities of the companies involved, their investors and the amount of credits claimed remains confidential. Lawmakers considered making public the identities of those benefitting from Act 221, but the measure died during the waning hours of the session.

The Lingle administration estimated 15 percent to 20 percent of claims for the tax credits were illegal. The state tax department is auditing about 20 percent of roughly $60 million in credits claimed. However, no instance of abuse has been made public.

Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093. Advertiser staff reporter Catherine Toth contributed to this story.