Tax credit brings $822M in investments
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By Sean Hao
Advertiser Staff Writer
By Sean Hao
A major tax credit helped generate $822 million in investments and 5,383 jobs from 2002 to 2006, according to figures released yesterday by the state tax department. However, more than half of those jobs were temporary positions generated by movies, TV shows and other performing arts projects.
The tax credit aims to diversify the state's tourism-dependent economy with incentives to invest in technology, film and television production companies.
By 2006, the most recent year in which data were available, the payroll of reporting businesses that benefited from the program totaled 2,322 positions. The program cost the state nearly $70 million in foregone taxes in 2005 and $195 million during its first five years, the report said.
The figures provide the most comprehensive look at the costs and benefits of the program. However, it's unlikely the report will settle an ongoing debate about whether the credits are worth the cost and are turning Hawai'i into a high-tech haven.
"It probably would be premature to claim that these numbers show that the tax credit is an unambiguous success, or that it's obviously a failure," said Chris Grandy, a professor of public administration at the University of Hawai'i.
Advocates, who primarily include officials of technology companies, investors and others benefiting from the program, contend that the economic activity generated by the program offsets its cost. They say the tax credit generates much-needed investment capital for local businesses.
From that standpoint the credits are clearly a success, said Jeff Au, managing director for local venture fund manager PacifiCap. Those Hawai'i investments occurred when technology companies nationwide struggled to find investment capital, he said.
"Eight hundred million (in investments) is great for this state," Au said, adding that it far exceeds what anyone's expectations would have been.
Qualifying technology companies reported spending more than $1 billion from 2002 to 2006, including $500 million in wages, according to the state Department of Taxation. The median wage of companies benefiting from the credits was $46,105 in 2006. The median is the point at which half the wages are higher and half lower.
"No matter how you count it, the benefits exceed the cost and that's just the beginning before these companies grow," Au said.
Evaluating the economic impact of the credits has been difficult because the identities of the companies that benefit remains confidential. Also, the state has sketchy data on technology jobs and reports program costs on a two-year lagging basis.
The estimated gains in the technology employment occurred during a period of prolonged and robust economic growth statewide across nearly all sectors. Since 2002, Hawai'i's economy has created nearly 60,000 new jobs, according to the state. That's more than four times the entire estimated employment of the technology sector.
It's likely that at least a portion of the estimated gains in the technology sector would have occurred without the credits, said Paul Brewbaker, Bank of Hawaii's chief economist.
"Would these jobs have been created even without these tax credits?" he said. "It's not as if the growth of technology-oriented businesses is going on in a void. They're going on in the context of a revolution.
"We observe a lot of places where these things are occurring without credits, so it's not unreasonable to conjecture that at least some of it might have happened" without the credits, Brewbaker said.
JOBS FIGURES UNRELIABLE
Created in 2001 under Act 221, the credits provide a 100 percent tax break for technology investments. Although qualifications for the program were tightened in 2004 under Act 215, the credits are still considered generous compared with those offered by other states. The credits are available to investors in technology as well as performing arts ventures.
According to tax department figures, 2,856 jobs, or more than half of the total jobs created via tax credits from 2002 to 2006, occurred at performing arts businesses.
However, in 2006, performing arts businesses reported employing just 307 people.
Businesses benefiting from the credits during the life of the program include ABC's hit show "Lost" and movies such as "The Big Bounce" and "Blue Crush."
In 2006, companies benefiting from the credits employed 2,322 people overall, according to the tax department.
However, the tax department said the jobs figures are not a reliable indicator because companies that filed the information didn't distinguish between part-time and full-time jobs, and some companies included jobs created outside Hawai'i or by suppliers.
In addition, the jobs figures may underestimate actual jobs created because some companies benefiting from the program did not report data to tax officials.
There's also uncertainty about the value of credits claimed in the future, which could complicate the task of determining the costs and benefits of the program that sunsets in 2010. Because the credits must be claimed over at least five years, the state is liable for the credits until at least 2015. Some forecasts put the total cost of the program between $600 million to $1 billion.
Which companies received the $822 million in investments were not disclosed, though $285 million went into performing arts-related projects such as movies and TV shows. That leaves an estimated $537 million invested in roughly 200 technology companies statewide.
That money is creating Hawai'i's next generation of skilled high-tech workers and entrepreneurs, said Lisa Gibson, president of the Hawaii Science & Technology Council.
"You're fundamentally changing the structure of the economy," she said. "That should pay off year after year after year going forward."
The identities of companies and investors benefitting from the credits has been confidential, though a small number have publically acknowledged participating.
However, starting this summer, the identities of companies that benefit will be made public. In the past, lawmakers have said that making names public might discourage companies from participating in the program.
That policy was changed last spring after a report by the Tax Review Commission that criticized the state for providing generous tax credits without tracking the costs and benefits.
Under the changes, high-technology businesses are required to consent to the public disclosure of their business name and status as a beneficiary of the credit for any investments made after June 30. The law does not specify when those names will be disclosed nor does the law divulge the individual amounts of the credits or the identities of investors claiming the credits.
The goal of the changes is to increase transparency so lawmakers can determine whether the tax breaks should remain in place beyond 2010.
So far, the Hawai'i industry is dominated by about two dozen relatively well-known companies, though more than 200 businesses benefit from the program. Technology companies overall generate about 14,000 jobs statewide, which ranked 47th among the U.S. states in 2005, according to the American Electronics Association. That's about 2 percent of a total of 617,000 jobs statewide.
Since 2001, one company —Hoku Scientific — has had its shares added to the Nasdaq Stock Market. 'Aiea-based Hawaii Biotech has filed an application with the U.S. Food and Drug Administration to conduct human clinical trials for a West Nile virus vaccine. And last year, Honolulu-based Hoana Medical received Food and Drug Administration approval to start selling advanced hospital bed technology.
A MIXED RECORD
Meanwhile several high-profile companies that benefited from the program have struggled, cut jobs or moved their headquarters out of the state. For example, both Hawaii Biotech and Hoku Scientific have had layoffs. Hoku also recently announced plans to sell its Kapolei headquarters and build a $260 million factory in Idaho.
EzRez Software Inc., a company founded here in 2003, recently announced plans to move its headquarters to San Francisco. Firetide Inc., a wireless computer networking company, in 2004 moved its headquarters to Los Gatos, Calif. And last year, AssistGuide, which was founded in Hawai'i, changed its name to AGIS and moved its headquarters to San Ramon, Calif.
In 2004, HotU Inc., one of the first companies to benefit from the technology investment tax credit was liquidated during bankruptcy proceedings.
David Watumull, chief executive of 'Aiea-based Cardax Pharmaceuticals, said it will take at least a decade for Hawai'i to build its technology credentials.
"We think it will take 10 years of time to get some inkling of the first crop (of companies), let alone the last crop," he said. Meanwhile, "You have this independent third party — the department of taxation — which has vetted whether these companies qualify (for the program) ... and you're seeing a significant amount of capital going into these companies.
"For most of us, until you have the end piece, which is the (initial public offerings) and the patents, that's a very important and valid assessment of activity."
Lowell Kalapa, head of the Tax Foundation of Hawai'i research group, said the state would achieve better returns by improving the overall business climate by lowering taxes or reducing the cost of state government. There's "really a misunderstanding of what it's going to take to attract and develop new industries in Hawai'i and that is improving the business climate," he said.
Tax credits are "a temporary antidote to the real problem, which is that we make it so difficult for businesses to survive," Kalapa said.
Reach Sean Hao at firstname.lastname@example.org.
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