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The Honolulu Advertiser
Posted on: Thursday, March 25, 2004

Stricter rules proposed for extended Act 221

By Sean Hao
Advertiser Staff Writer

The state would extend the Act 221 technology tax credits another five years, and require companies benefiting from the program to disclose who they are under a bill adopted by a key House committee yesterday.

The measure also would direct the state tax department to stop applying the credits "liberally" and give the department more authority and resources to police the controversial tax break.

Those moves come partly in response to testimony Monday that an estimated 15 percent to 20 percent of the dollar total of Act 221 claims might violate criminal or civil laws.

"This draft points us in the direction of tightening the qualifying requirements and making sure we help the kind of technology companies that are going to diversify our economy and produce high-quality jobs for young people," said state Rep. Brian Schatz, D-25th (Makiki, Tantalus), chairman of the House Economic Development and Business Concerns Committee.

State lawmakers passed Act 221 in 2001 to encourage a technology industry in a state dependent on tourism and the military. While the program has helped some high-tech companies, it has generated growing concern that 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.

So far, investors have claimed $161 million in Act 221 tax credits, though the actual cost in the first two years was about $57 million because credits are spread over five years.

The House bill is a compromise: It gives Gov. Linda Lingle, who is concerned about the drain on state coffers, more restrictive language, while Act 221 supporters would see five more years of credits that would otherwise expire next year. The bill, which originated in the Senate, will need approval of the full House, full Senate and the governor before it becomes law.

On Monday, state tax director Kurt Kawafuchi surprised lawmakers with his estimate of Act 221 claims that might be illegal.

Schatz said serious questions remain about the tax department's testimony. "Everyone needs to be careful how they use data," he said. "We don't want to cause a panic through the business community."

Kawafuchi did not attend yesterday's committee hearing and was unavailable for comment. However, Ted Liu, Lingle's top economic adviser, corroborated the 15 to 20 percent figure. Applied to the total value of tax credits claimed so far, it amounts to about $24.2 million to $32.2 million of the claims that could be illegal.

To help prevent abuse of the credits, Schatz's committee voted to establish a corporate investigation team within the tax department staffed by eight full-time auditors. The committee also adopted a provision that would prevent the tax department from being sued for denying tax credit claims.

Under the bill, the identities of companies and other business entities that benefit from the credits, some investors who claim the credits and the amount of the credits would be made public. Individuals would not be listed.

The committee also voted to strike language requiring that the law be applied liberally. The act would now be construed "neutrally" starting in 2006.

The Lingle administration favored removing the liberal language. Liu, director of the Department of Business, Economic Development and Tourism, had equated it to a license to speed, leading tax filers to take overly aggressive claims on their returns.

"If you pass a law that allows speeding and people aggressively speed, you have two options — change the law or hire more police officers," he said. "We prefer they change the law."

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