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The Honolulu Advertiser
Updated at 1:45 p.m., Monday, December 29, 2008

Preserve the core intent of high-tech tax credits

A new study that puts the cost of the state's high-tech tax credits at roughly $747 million from its inception in 1999 through 2007 has raised some eyebrows and some controversy.

As The Advertiser's Sean Hao reported, the state Department of Taxation shows that the 177 companies benefiting from the tax credits created just 2,245 direct jobs in 2007.

That news is sure to be fodder as the Legislature considers whether to extend the credits, which sunset in 2010.

But not so fast, say supporters of the tax credits. The state's study is fundamentally flawed in that it aggregated the cost of the program over eight years, yet only highlighted jobs created during one year. In reality, they say, the actual costs are closer to $400 million, and when independent contract jobs are included in the mix — as they should be, since that's how many smaller start-ups staff their businesses — the credits created more than 4,000 jobs.

It's imperative that both sides carefully weigh the benefits of Act 221, which provides 100 percent tax credit for technology investments; the corresponding Act 215, in 2004 tightened qualifications for who can claim the credits.

Clearly the Legislature and the state should not lose sight of the important premise of Act 221, which is increasingly important in today's economy. That is to diversify Hawai'i's tourism-based economy and to build a technology sector here resulting in higher-paying jobs.

There are positive signposts along the way: The report showed average salary for full-time tech-sector jobs was $76,790; the tax credits have generated $1.2 billion in technology investments; and proponents say technology companies have thus far spent about $1.4 billion in Hawai'i. That, too, is an important part of the mix.

Growing a new industry, particularly here in the Islands, won't happen over night. But at a time when the state is weighing increasingly precious dollars, finding a more effective and efficient way to maximize the benefits of these credits makes sense.

So far, the state's push to increase the penalty for companies that take their operations and their jobs out of Hawai'i from 10 to 50 percent, and tightening the definition on who can receive the credits seems reasonable.

The state should listen, too, to tech companies and industry leaders to ensure the changes would not have unintended consequences, which can often be the case when tinkering with tax credit proposals.

Now is the time to get the legwork done on changes that would be proposed in the upcoming session. Both sides must work collaboratively and diligently to protect the intent of economic diversification and job creation.

During these tough economic times, we cannot afford to let those crucial issues get lost in the political shuffle.