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The Honolulu Advertiser
Posted on: Sunday, December 3, 2006

Tech credit called 'substantial drain'

By Sean Hao
Advertiser Staff Writer

The state's technology tax incentives are expensive and have not produced measurable growth in technology jobs, according to a new report by the state Tax Review Commission.

The panel, made up of seven tax experts appointed by Gov. Linda Lingle, urged lawmakers to change the tax credit into a grant program to avoid a potential "black hole" in state budgeting.

The tax credits, known as Act 221/215, were adopted in 2001 with the goal of boosting Hawai'i's economy and moving it away from dependency on tourism. The credits have no cap and are forecast to cost the state $600 million to $1 billion in lost revenue over the life of the 10-year program.

"We are concerned that the credit imposes a substantial drain on the resources of the state," the tax panel said in its report adopted late last week. "We recommend that the Legislature avoid using tax credits as an economic development tool."

Isaac Choy, chairman of the Tax Review Commission and a partner at the Manoa Consulting Group, said he wants the Legislature to follow up on the panel's recommendations. "I think it should be taken up. Whether it is taken up, I don't know," he said.

Senate president Colleen Hanabusa, D-21st (Nanakuli, Makaha), has said the Legislature might change the tax credits if there's a strong public outcry. However, House Speaker Calvin Say, D-20th (St. Louis Heights, Palolo, Wilhelmina Rise), said he sees no need to change them.

Supporters of the tax incentives say they are a positive way to generate jobs and economic development.

It is difficult, however, to document their impact because of a lack of information. The state does not release information on the investors or companies making use of the tax credits, or the number of jobs created as a direct result.

"I don't fault the Legislature for trying the tax credits," Choy said. "I do fault them for not keeping score. It's like they went into the game without a scorekeeper or rules to the game. How do you know if you won if there's no score and no rules?"

A grant program run by a state agency to support local technology companies would increase accountability and curb potential abuses, the tax panel said.

The tax review panel also called for an independent evaluation of the costs and benefits of Act 221/215.

Technology job growth lagged behind overall job growth in Hawai'i in rising by just 350 new positions between 2001, when the program started, and 2005, according to a recent state report. During the same time, an estimated $311 million in credits were generated, though that loss in revenues is spread out over multiple years.

Technology industry advocates maintain the credits are boosting the number of jobs in Hawai'i's tech sector, but acknowledge that they lack proof Hawai'i is becoming a hub for high technology. David Watumull, chief executive of 'Aiea biotech firm Cardax Pharmaceuticals, agreed that more information is needed to assess the economic impact of the credits.

Proponents of the tax credits argue that it will take time for startup technology companies to add jobs. Meanwhile, the tax credit program is generating much-needed investment capital for local businesses, they say.

"I think that's a very important accomplishment," Watumull said.

Any attempt to change the credits could have a chilling effect by creating uncertainty about the program's future, Watumull said. Additionally, a grant-based program would not generate the same level of private-sector investment that the tax credits currently spur, he added.

The state adopted Act 221 in 2001. The credits were updated in 2004 as Act 215. They give investors a $1 tax credit for every $1 invested in a qualified technology company.

If lawmakers aren't willing to change the tax credits into grants, they should increase transparency and require timely disclosure of data needed to evaluate the program's effectiveness, the commission said. That includes releasing annual aggregate sales, employment and salaries as well as information on the number of copyrights, patents and trademarks received.

"I think we can solve those (transparency) issues without changing (Act) 215 or 221 itself," Watumull said. "A lot of that information is collected but not really collated or distributed."

The Tax Review Commission, which is charged with reviewing the state tax structure and determining whether tax policies are sound, is appointed by the governor every five years.

This is not the first time the panel has criticized state tax breaks for businesses. The commission's last report, released in 2002, recommended that the state Legislature overhaul tax benefits for businesses by narrowing the scope and duration of the incentives, conducting cost-benefit studies before creating new tax breaks and periodically evaluating existing tax incentives meant to spur business investment and job creation. The Legislature has yet to take any such actions.

Last week's tax panel report suggested that the state could better stimulate the economy by lowering taxes for everybody instead of providing special tax exemptions and deductions for certain sectors such as technology. That would be more equitable and efficient, panel chairman Choy said.

"Drop rates across the board," Choy said. "That will have a bigger economic impact and we're not giving the government any less money to spend."

Reach Sean Hao at shao@honoluluadvertiser.com.