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The Honolulu Advertiser
Posted on: Monday, December 29, 2008

Tech tax credits cost Hawaii $747 million

By Sean Hao
Advertiser Staff Writer

Hawaii news photo - The Honolulu Advertiser

State Rep. Isaac Choy, D-Manoa

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"If we're trying to attract jobs, the cost per job is way too high ... "

State Rep. Isaac Choy | D-Manoa

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$1,000,000,000

Potential total cost of the tax credit

177

Number of companies benefiting from the credit

2,245

Number of jobs directly created by those firms

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Hawai'i's attempt to create a high-tech industry using generous and opaque tax credits cost an estimated $747 million through 2007, according to a new study by the state.

It's the most comprehensive cost estimate to date and an indication that the total cost of the program could eventually exceed $1 billion. That's more than twice the estimated repair and maintenance backlog at all Hawai'i elementary, middle and high schools. It's also enough money to pay nearly one-fifth the $5.3 billion cost of O'ahu's proposed mass-transit rail system.

The incentives, which were created in 1999 and significantly expanded in 2001, provide tax credits to technology investors and research companies. They were created with the goal of boosting Hawai'i's economy and moving it away from dependency on tourism.

However, a new report by the the state tax department released last week raises concerns about the mounting costs of the program and whether it's significantly diversifying the local economy. While there are anecdotal signs the credits are helping create high-tech jobs, there's been no explosion of the high-technology industry in the state.

In 2007, the 177 companies benefiting from tax-credit generated investments created just 2,245 direct jobs, according to the new report. That's a fraction of the state's more than 621,000 overall jobs.

The report was released the same day Gov. Linda Lingle proposed in her new budget to tighten tax credits for technology investments. She estimated doing so would free up $122 million to help offset a state budget deficit.

"These are very challenging economic and fiscal times for the whole state and there's a lot of sacrifices that need to be made throughout the state and whole economy," said state tax director Kurt Kawafuchi. "So we are looking at tightening the credit as well as reducing excessive tax credits."

From 1999 through 2007, the cost of the program is estimated at $657.5 million in income tax credits and $89.5 million in corporate research tax credits. Those figures include actual costs and an estimate of the future costs of investments made through 2007.

STUDY HAS CRITICS

Advocates for the credits, 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.

Lisa Gibson, president of the Hawaii Science and Technology Institute, criticized the study for comparing the total cost of the tax credits to the number of jobs created in just one year. Gibson and other industry proponents said it's too soon to expect major results from the credits.

"This is a tax credit that's been designed to grow an industry over time," she said. "What they've done in this report is take one year of benefits and compared it with eight years of costs. That seems like misinformation. This is not a well-done report," Gibson said.

The credits provide a 100 percent tax break for technology investments. Although qualifications for Act 221 of 2001 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.

Lowell Kalapa, head of the Tax Foundation of Hawaii research group, called the program's $747 million and growing price tag appalling. Because the credits must be claimed over at least five years, the state is liable for the credits until at least 2014.

"That's a lot of money (and) that's just the tip of the iceberg," Kalapa said. "The hangover doesn't quit so what will be the total cost of this program over 15 years?"

There's no question the credits, which so far have helped generate $1.2 billion in technology investments, have been beneficial to many local technology companies. The issue is whether those jobs are costing the state too much money.

"I think that's the question that this report raises," said Lingle policy adviser Linda Smith. "We recognize the importance of diversifying the economy and Act 221 is one of the tools involved in that diversification."

However, "we want to make sure we target it more effectively on technology companies that have a long-term viability in the state."

MANY JOBS TEMPORARY

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 many cases, these jobs were temporary in nature. In addition, several high-profile companies that benefited from the program have struggled, cut jobs or moved their headquarters out of the state.

Evaluating the economic impact of the credits has been difficult because until this year, the identities of the companies that benefit remained confidential. This year, the identities of some companies benefiting from the credits became public. Many companies on the list are those typically thought of as small- to mid-size technology companies, such as Nanopoint Inc. and Hawaii Biotech Inc.

However, the list also showed credits could be claimed for money put into a Big Island timber company, a deep-ocean water bottling firm and the computer programming arm of an insurer.

CRITICS FAULT COSTS

State Rep. Isaac Choy, D-Manoa, said the credits are costing too much money.

"If we're trying to attract jobs, the cost per job is way too high," said Choy, who previously served on a state Tax Review Commission that criticized the state for providing generous tax credits without tracking the costs and benefits. "My personal opinion is Hawai'i can't afford this credit and the credit has not turned out to be what it's supposed to be.

"Just think, if we set aside $600 million for hotel rooms we would have got more bang for the buck."

Industry advocates contend the tax credits are needed to create high-wage, high-skilled jobs that can help keep kama'aina from migrating to the Mainland while helping bring others back home. The average salary for full-time jobs at technology companies was $76,790, according to the report.

The technology industry had hoped to push for an extension of the tax credit program beyond 2010 during the upcoming legislative session. Now it seems they'll be fighting just to keep the tax credits intact until they sunset in 2010.

David Watumull, chief executive officer of 'Aiea-based Cardax Pharmaceuticals, said the current economic downturn means fewer investments in technology companies, which already is translating into fewer tax credits.

Watumull said tax credits have helped generate $1.4 billion in spending by technology companies in Hawai'i. When independent contract jobs are included, the credits helped create more than 4,000 jobs, he said.

"Is there somewhere else you can put that money that would generate that kind of leverage?" Watumull said. "We believe that when we get an apples to apples, oranges to oranges direct comparison, they will see there's significant benefit to the state for the program."

Reach Sean Hao at shao@honoluluadvertiser.com.