Hawai'i's wealthiest residents are among the biggest beneficiaries of the state's tax credits for technology investors.

Individuals with incomes of $200,000 or more claimed $56.8 million in technology investment tax credits in 2006, according to recently released figures. That's more than 95 percent of all technology investment tax credits claimed by individuals that year.

The tax credits were created with the goal of diversifying Hawai'i's economy by providing incentives for residents to invest in technology ventures. The idea was to spur the creation of high-paying, highly skilled jobs in an economy that relies heavily on tourism.

Under the program, 1,033 residents with incomes of at least $200,000 cut their state income taxes by an average of $54,995 in 2006, according to the state Department of Taxation. A Hawai'i resident owing $54,995 in state income tax for one year likely had income of more than $600,000.

The figures show that while the credits are succeeding in persuading Hawai'i's wealthiest residents to invest in local technology companies, they are also shifting the tax burden to lower-income residents, critics say.

"That's what's not fair," said Lowell Kalapa, president of the nonprofit Tax Foundation of Hawaii. "For those of us who don't have that kind of money to throw around, we're still ending up paying state taxes. We're paying for the schools. We're paying for the prisons, for healthcare, for social services. Meanwhile, the rich guys are not paying for anything."

The credits, known as Act 221 and Act 215, provide a 100 percent tax break for technology investments. The credit is spread over five years. That means an investor has to have cash up front and be able to wait five years for the full tax benefit.

Only 35 percent of the credits can be claimed in the first year. A person with a state tax liability of $10,000 in one year would need to invest about $29,000 into a qualified high-tech business to erase that liability.

The credits are geared toward wealthy investors who typically invest at levels allowing them to substantially reduce or eliminate their state income tax liability.

In addition to the high ante to get into the game, many qualified high-tech businesses won't accept small investments or investments from individuals that don't have high incomes or high net worth.

Those benefiting from the tax credits tend to be wealthy because securities laws restrict such private equity sales to high-net-worth individuals, said Jeff Au, managing director for Honolulu venture capital firm PacifiCap Management Inc. The idea is to prevent small, non-savvy investors from getting burned through private equity.

"Frankly, as a venture capitalist I only want to take money from high-net-worth individuals — not because I'm a snob, but because I know it's risky and I don't want to take money from anybody who can't afford to lose it," Au said.

That may be why only 123 taxpayers with annual incomes below $50,000 took advantage of the tax credit while 1,522 taxpayers with incomes of more than $100,000 used the credit.

PROGRESS TOWARD TECH

Supporters of the credits say that before their creation in 2001, local investors were averse to investing in technology.

"They weren't investing in tech companies, and what this did is it created the spark to get them to start investing," Au said. "What the credits do is they help mitigate the downside risk. This is the extra thing that's going to push them (investors) over and to do it."

Overall, the costs of the tax credits are small compared with the state's budget and the benefits of the high-tech jobs created, Au said.

"A million dollars (in tax credits) is a lot of money, but a million dollars within the context of a one-year state budget of $10 billion or a 10-year state budget of $100 billion is not a lot of money," he said.

Tax credit advocates argue the credits have helped generate $1.4 billion in spending by technology companies in Hawai'i, which in turn created more than 4,000 jobs.

The investment tax credits are capped at $2 million per year per investment and the credits must be claimed over at least a five-year period. The credits are not refundable, but they can be carried forward if they exceed an individual's current tax liability. Investors cannot claim the credits if the company they invest in fails.

MAINLAND INVESTMENT

The program also allows Hawai'i residents to double up on their tax credit by trading their investments with nonlocal investors. For example, a resident can invest $15,000 in a local company and get stock in that company. The local investor then finds a Mainland investor who doesn't pay Hawai'i income tax and doesn't need the tax credit. If the Mainland investor has also put $15,000 into the same company, the local investor can give her shares in the company to the Mainland investor and use the Mainland investor's tax credit.

The result is the local investor gets a $30,000 reduction in state income tax, and the Mainland investor gets double the stock for his or her $15,000 investment.

News about tax credit opportunities often is spread by word of mouth via a network of tax attorneys, accountants and venture capitalists. Investors also typically need to sign elaborate partnership agreements to receive the credits.

From 1999 through 2007, the technology investment tax credits cost the state an estimated $657.5 million in tax revenues, according to the tax department. Individual investors weren't the only ones claiming that money. In 2006, the latest year for which figures are available, individuals claimed $59.6 million in investment tax credits followed by insurance companies ($26.7 million), financial corporations ($10.2 million) and corporations ($8.5 million).