Release of Act 221 claims may have been improper

By Sean Hao
Advertiser Staff Writer

State tax officials — under pressure to document the impact of technology tax credits — released taxpayer information last year to the labor department, a potential breach of confidentiality.

The state attorney general has since said the tax department should avoid sharing taxpayer information with other state agencies for such purposes. Tax experts say sharing information undermines a key principle that information from filings remain strictly confidential.

Last year on Feb. 24 and Oct. 10, the Department of Taxation provided lists of taxpayers claiming Act 221 technology tax credits, including their federal identification and Social Security numbers, to the Department of Labor and Industrial Relations, according to a response to The Advertiser's request for records under the state's Uniform Information Practices Act.

The documents were given to the labor department by tax department director Kurt Kawafuchi before receiving a Nov. 13 opinion by the attorney general stating that confidential tax information identifying Act 221 companies should not be shared with other agencies.

Confidentiality of returns "is a very important concept in the American tax system both at the federal and state level," said David Brunori, contributing editor for tax policy magazine State Tax Notes in Washington, D.C. "Without it, the system would collapse. Virtually every state and federal law has very, very strict positions about (what constitutes) disclosure of tax return information — that is anything that would allow a third party to identify a taxpayer's identity or any financial information."

Kawafuchi said he shared the taxpayer information to answer questions from the Legislature, the media and the public regarding the benefits of technology tax credits.

The credits were designed to encourage investment in technology-related companies and have created 600 technology jobs in 2002, according to state estimates. Firms and investors have claimed $161 million in Act 221 tax credits, which have come under fire for being overly generous and, in some cases, creating only temporary jobs.

State law makes it a criminal offense for any tax department officer to disclose tax returns or tax-return information. However, unlike federal laws that strictly restrict sharing of confidential tax information, the wording of the state law is not as precise, Kawafuchi said.

"Because the statute is vague, I think the (tax) director has the discretion" to release taxpayer information to labor officials, Kawafuchi said.

Kawafuchi said he sought the attorney general's advice on the matter only after Department of Business, Economic Development and Tourism officials also sought tax return information.

'More careful'

Deputy Attorney General Hugh Jones said he could not disclose the agency's advice to the tax department because of attorney-client confidentiality. Kawafuchi would not provide a copy of the opinion for similar reasons. In general, the attorney general said information from tax returns should not be shared outside the tax department to gauge the economic benefits of Act 221, Kawafuchi said.

Attorneys general "are being extra cautious," Kawafuchi added. "It doesn't mean our interpretation is illegal."

However, Kawafuchi said, "Since we've received that advice, we have taken a more conservative approach. We've tried to be more careful."

Jones said his office is aware that tax information was shared, but would not comment on whether there was investigation into the matter. Violations of tax confidentiality laws are punishable by a fine of no more than $500 and/or imprisonment of no more than one year.

Linda Smith, Gov. Linda Lingle's senior policy adviser, said the tax department will not release additional names to labor officials as it tries to assess the job impact of Act 221.

"(Kurt) believed at least at that time that it was information that he could share with another government organization," she said. "The department has since taken the steps they believe they needed to based on the advice they got from the attorney general."

The tax department shared the names of about 50 Act 221 companies with the labor department and received back employment and wage data for 23 of those companies for the years 1999-2002.

In the future, instead of sharing a list of Act 221 companies with the labor department, tax officials will receive the job and wage data from the Labor Department, Smith said. Tax officials can then sift through the numbers for figures on Act 221 companies.

Although Act 221 was designed to spur growth in the technology sector, there are no requirements that Act 221 companies create jobs, said Jeff Au, managing director for Honolulu venture capital firm PacifiCap Group LLC, which invested in Act 221 beneficiary HotU.

That means job creation "is not even an enforcement question or a compliance question the department should be asking much less outside the department," he said. "I don't see the benefits justifying the costs of the breech in confidentiality."

Inter-agency sharing

Smith downplayed the impact of the tax department's actions.

"This was information shared between a government agency — it's not like it was shared with the public," she said.

Others familiar with tax principles disagreed. In general few exceptions allow inter-agency sharing of tax return data at state and federal levels, said Brunori, the tax magazine editor. Those typically apply during criminal proceedings and only after a court order, he said.

"The (Internal Revenues Service) can't share information with the (Securities and Exchange Commission) on individual taxpayers," Brunori said. "There are very few exceptions to that rule.

"It's a slippery slope when you go down there."

Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i, said the tax department's actions were improper, if not illegal.

"It was probably borderline illegal," Kalapa said. "They should never have done that. It's a no-brainer. You should never, never, never, never disclose confidential tax information."

Kawafuchi maintained his actions were appropriate.

"It's something I had a responsibility to the public to do," he said. "I think the public wanted to know — are we getting a return for all this money?"

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