Posted on: Friday, March 5, 2004
Act 221 technology credit largely missed mark
By Sean Hao
Advertiser Staff Writer
A state technology tax credit generated nearly $112 million in investments for Hawai'i companies during its first two years, but a significant part of that — as much as $62 million — may have gone to businesses that either didn't create permanent jobs or weren't high-tech.
Ted Liu, director for the Department of Business, Economic Development and Tourism, said yesterday that only about $50 million of the so-called Act 221 investments went to technology companies. Where the rest of the money went is still unclear, though Liu suspects many non-high-tech companies took advantage of the program's loose definitions to provide tax benefits to investors.
"There seems to have been some other structures that claimed 221 qualification that may not be part of what was intended by the drafters" of the tax credits, Liu said.
Liu and Kurt Kawafuchi, director of the state Department of Taxation, provided the first detailed accounting yesterday of Act 221 usage in response to a request from The Advertiser.
The act took effect in 2001 and cost the state's general fund nearly $60 million in its first two years. The cost to taxpayers is expected to reach $48.4 million this fiscal year and $76.7 million in fiscal 2005, according to state estimates.
According to the law, every dollar invested in qualifying high-technology ventures, including film and television productions, can be used to reduce state tax obligations by $1. The tax credits are spread over a five-year period and capped at $2 million per investment.
Proponents of Act 221 argue that the credits are a valuable economic tool for promoting business growth and creating new jobs in a state overly dependent on tourism and military dollars. Critics say the credits are overly generous, have failed to produce tangible economic benefits for the state and have been shrouded in secrecy that prevents public accountability.
Gov. Linda Lingle and the state Legislature are looking at extending the act, which was set to expire next year, for five more years, tightening the offer strictly to high-tech companies. They hope to crack down on investors who wrote off money pumped into movie and TV projects that did not create permanent jobs, and investments specifically designed to avoid state taxes.
Liu said an estimated $20 million was invested in one-shot movie deals in 2001 and 2002 using Act 221 credits, and it was unlikely the remaining $92 million went to high-tech companies.
"Frankly, if $90 million went into them, they'd be much more successful than they are today," Liu said.
Kawafuchi offered the example of tax credits given to investors in "software development companies" that really just sold software.
"We've run across cases where it's software companies that are basically taking off the shelf things" and selling them, Kawafuchi said.
According to surveys of Act 221 investors, $12.6 million was pumped into software development in 2002, and Kawafuchi questions how much of that money
actually went to companies that wrote or created software.
While the cost of the program in its initial two years is now more clear, state officials said the economic impact of the act on jobs is still not known and probably won't be for months.
Liu and Kawafuchi said preliminary job figures for 2002 reported by those claiming the credits show job growth. However, those figures don't correspond to growth in payroll.
"We're looking at job data that doesn't fit, doesn't check out, and we haven't had time yet or the ability to cross-check it with" the state Labor Department, Liu said.
"But there is an inference that there's a number of new jobs created between 2001 and 2002 that is kind of out of the ordinary. If you look at the growth in payroll, it doesn't check out."
Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.
