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The Honolulu Advertiser
Posted on: Saturday, October 7, 2006

Isles' tech jobs drop despite tax credit

By Sean Hao
Advertiser Staff Writer

The number of technology related jobs in Hawai'i likely fell by 2.7 percent between 2001 and 2004 despite the state offering the nation's most generous technology tax credits, according to a draft of a new state study released yesterday.

The study, conducted for the state's Tax Review Commission, concluded the state's tech tax credit program has been successful in generating significant investment capital for local companies, but that hasn't translated into a jump in jobs.

"It does seem that the total number of (technology) jobs has gone down and the relative share of technology jobs has gone down," said University of West Georgia professor Bruce Bird, the report's co-author.

The report noted that a lack of information about the tax credits known as Act 221/215 makes it difficult to determine whether the state is getting good value for the credits.

The state adopted Act 221 in 2001 to encourage investment in technology companies and help diversify the state's economy, which is heavily dependent on tourism. The credits were updated in 2004 as Act 215. They provide investors a $1 tax credit for every $1 invested in a qualified technology company.

$185 MILLION IN INVESTMENTS

The credits have helped generate about $185 million in investment into Hawai'i companies since 2001, according to the state tax department. And since then, the state has foregone $110 million in tax revenues as a result of the program. Some of the tax credits will be taken in future years.

While the boost in investment capital is good for local companies, it's only an intermediate outcome of the program, said Marcia Sakai, a co-author of the report which was presented at the state Capitol yesterday.

"Because of the public subsidy that's involved here the test of the effectiveness of the statute really needs to be looking beyond the level of investments received," said Sakai, dean of the College of Business Administration at the University of Hawai'i at Hilo.

However, information on other indicators of the benefits of the program, such as the number and type of jobs created, is sketchy.

State data on the level of Hawai'i tech jobs in recent years show a 2.7 percent decline to 13,106 jobs between 2001 and 2004. At the same time, data reported by companies benefitting from the credits point to the creation of more than 4,000 jobs within that period.

The report's authors also cautioned that it will take time for start-up companies to add jobs.

Ann Chung, vice president of government and community affairs for the Hawaii Science & Technology Council, a trade group representing the technology industry, said the state job creation numbers aren't accurate. The industry reported figures showing jobs are more representative of industry job growth.

"It's something the whole nation is struggling with is how do you capture that (technology) job data from a Department of Labor standpoint," she said. "It's a bigger issue in terms of how things are tracked."

Evaluating the credits is difficult because identities of the companies benefitting from the credits is confidential and the state does not track the number of jobs created. In addition, the state releases data on the cost of the credits sometimes years after they're claimed.

The report recommended the state create more accountability for the credits, including conducting a cost benefit analysis before starting any new program and conducting annual tax credit reviews. The state's tax credit programs also should have simple, objective qualifying criteria and make more information publically available in a more timely manner.

Just how much the technology tax credit program will cost between 2001 and 2010 when it ends remains to be seen. However, Sakai estimated the cost could top $600 million.

"By way of comparison ... my home institution of UH-Hilo's entire state-funded budget is $30 million a year," she said. "This $600 million, while (it) could be deployed to appropriate investments, at the same time represents funds that might be otherwise used for state purposes.

"The program should be treated as a tax expenditure as money that is not otherwise going into the treasury for other public purposes and therefore should bear the same burden of proof that any program that's gong for direct expenditures needs to provide," Sakai said.

FINAL REPORT COMING

The Tax Review Commission, which ordered the report, is charged with reviewing the state's tax code and recommending changes. The final report is due around the end of the year.

Technology industry advocates complained about various aspects of the report, including the job figures, following a two-hour presentation.

"I think we can address a lot of the assumptions, hypotheticals and data questions raised," said former state tax director Ray Kamikawa, an architect of the tax credits.

Commission Chairman Isaac Choy said technology industry representatives will be allowed to submit their concerns to the commission at a later date. Choy also urged state tax director Kurt Kawafuchi to provide the authors with more recent tax credit data after Bird complained that tax officials were not responsive to some requests for data. Kawafuchi pledged to work more directly with Sakai and Bird.

"Work on it and get the data to the professors," Choy said. "That's one thing that bothers me. We're looking at slides that are from 2002. That's not very high-tech to me."

Reach Sean Hao at shao@honoluluadvertiser.com.