Act 221 extended, limits technology tax credits
By Sean Hao
Advertiser Staff Writer
House and Senate leaders yesterday extended the state's controversial Act 221 technology tax credits for five years, but tightened eligibility in an attempt to prevent abuses.
Act 221 was created in 2001 to spur technology investments and diversify the state's economy away from tourism and the military. It has since come under increasing criticism as overly generous with credits, failing to produce tangible economic benefits and being shrouded in secrecy that prevents public accountability.
Changing and extending the program was among the key economic development-related issues handled by the Legislature this session, and lobbying continued until a final conference committee vote late in the day.
"It was a grueling process, and I think the bill really is a step forward for economic diversification," said Rep. Brian Schatz, D-25th (Makiki, Tantalus), chairman of the House Economic Development and Business Concerns Committee.
In the end, Democrats adopted much of what Republican Gov. Linda Lingle proposed, including taking out a provision that the act be "liberally" construed by tax officials, and restricting research credits to technology companies.
The tighter qualifications 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.
A conference committee approved the bill, which extends Act 221 until 2010, on a unanimous vote. The bill is expected to pass when the full House and Senate take it up next week.
Much of the drive to change Act 221 came out of a need to balance the state's budget, Schatz said.
Act 221 has generated $161 million in tax-credit claims, although the actual cost in the first two years was about $57 million, because the credits are spread over five years. Many now believe that $50 million, at most, actually went to high-tech startups intended to benefit from the program, such as Hoku Scientific, Hoana Medical and Firetide.
Ted Liu, director of the Department of Business, Economic Development and Tourism, said the changes would better focus Act 221 on growing the state's technology and knowledge-based industries.
"Obviously, that means the creation of growing, sustainable technology companies and high-paying jobs that our people will aspire to," he said.
Verifying the benefits of the program is difficult because much of the information — including identities of the companies involved, their investors and the amount of credits claimed — remains confidential. According to state estimates, the program created 600 jobs in 2002.
Just what, if any, changes were made to improve disclosure of companies and investors benefitting from the program was unclear. A final version of the bill was not available to the public as of late yesterday.
Even the revised Act 221 will be among the most generous technology tax incentives in the nation. The research credit provision alone provides a refund valued at 20 percent of a company's qualifying research and development expenses. The investment credit would provide a maximum 200 percent return on investment in a technology company. Those looking to claim credits at more than double their investment would have to justify their reasoning, under the bill.
The bill also would create a state-backed fund — the State Private Investment Fund, or SPIF — that provides $36 million in venture capital over three years for companies in need of cash to grow. Technology industry advocates had hoped for a 10-year, $100 million fund.
But given the state's financial situation, the bill to amend and extend Act 221 was the best the industry could expect, said Ann Chung, executive director of the Hawaii Technology Trade Association.
"This is a good thing for the tech industry — we got a five-year extension," she said. "We got SPIF, which is an incredible thing, although the amount may not be where we wanted it to be."
Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.
