Tech tax credit program demands close scrutiny
The most recent numbers on Acts 221 and 215, which offer tax incentives for investment in new technology firms, certainly look encouraging.
But the state needs to examine the payoff from every possible angle before deciding in 2010 whether the sacrifice in tax revenue is paying off.
The state Department of Taxation released a report on the program this week to meet a legislative deadline, but that data only yields a partial picture. A total of 177 businesses that accept investments that qualify for the technology credit had filed forms on time with the department, which anticipates that an additional one-third have yet to file.
So far, it would appear that the number of jobs created — one of the indices used to evaluate program success — is on the increase.
Specifically, the number of full-time workers employed by qualifying companies increased by 87 between 2006 and 2007 to a total of 1,450. While that growth is a positive sign, coming in the face of a softening economy in the mature business sectors, it's still a baby step.
Proponents of the law rightly point out that other indicators might be more useful, given that most startups don't hire many people initially.
For example, even while new companies conduct their early research and development using contractors rather than regular hires, the local economy still reaps a return.
According to the report, the businesses spent more than $1.4 billion in the state — in salaries, capital expenditures and other costs — since 2002. About $1.2 billion in cash was invested in the companies.
This flow of money into the economy arguably offsets the loss of $295.6 million in tax revenue since 1999, when the credits were implemented.
But among the questions remaining for lawmakers is how much of the influx of cash would have come with or without the lure of a tax credit. Since about a third of the claims were made on film and digital media research and productions — most notably, ABC-TV's "Lost" series — that's a legitimate question. Hawai'i does have its own attractions as a location for such projects.
Further, the list of qualifying companies now provided in the report indicates that the credits go for a range of purposes — everything from the more typical tech companies such as Nanopoint Inc. to the computer-programming arm of an insurance firm.
When they're reviewing the report next session, lawmakers will need to fill in the picture: What kind of businesses is the credit encouraging? They should consider whether narrowing the tax credit's qualifying criteria would achieve a better return.
Diversifying the economy for the state — and that is the purpose of these tax credits — is a long-term process, so expectations for growth should be kept within reasonable bounds. Many other improvements, including a more rigorous educational system that would develop a more highly skilled workforce to fill higher-paying jobs, are needed before a high-tech sector could realistically reach maturity.
In the meantime, state officials who are wrestling with overwhelming public needs and shrinking tax revenues need to pick through the data and ask probing questions to ensure that the state gets the most bang for the buck.