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The Honolulu Advertiser
Posted on: Wednesday, January 21, 2009

State considers reducing high-tech tax credit

By Greg Wiles
Advertiser Staff Writer

Hawaii news photo - The Honolulu Advertiser

Kurt Kawafuchi

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A controversial tax-credit program for high-technology investors and companies would be cut by 10 percent in the coming fiscal year and about 25 percent the following year under proposals being contemplated by Gov. Linda Lingle's administration.

State Tax Director Kurt Kawafuchi said the tax credits currently cost the state $150 million annually and that the administration would like to slice that by about $65 million over a two-year period.

"We're not seeking a repeal of Act 221 at this point," Kawafuchi said. "We're just asking for a tightening."

The high-tech credits are among several high-profile budget cuts being contemplated by Lingle as she wrestles with a projected revenue shortfall and budget problems. The credits have at times been controversial and two reports in recent months from Kawafuchi's department have raised questions about the program's benefit.

Known as Act 221, the tax-credit program was enacted nine years ago to jump-start a high-technology industry in the state by offering investors a 100 percent tax credit for any money they put into high-technology companies. The credits were seen as a way to serve notice to investors that Hawai'i was serious about building a high-technology industry at a time when venture capitalists looked elsewhere.

A separate 20 percent research activities tax credit also was enacted for qualified high-technology companies.

A December report by the state Tax Department said the high-tech tax investment credits had cost the state an estimated $657.5 million through 2007. The research credits cost another $89.4 million.

The study also concluded the acquisition cost of generating a full-time position through the credits was $535,000 each, while data indicated the state's acquisition cost for each successful technology company was $31.6 million.

Kawafuchi spoke at a joint state House and Senate legislative hearing yesterday, at which the study was heavily criticized by high-tech industry representatives. They said the report failed to look at employment and general excise taxes being generated by the companies and didn't examine how $1.4 billion of spending by technology companies here generated other jobs and benefits for the state's economy.

They also questioned the basis for the state's $657.5 million estimate and whether Lingle's administration had contemplated how many jobs and companies would be lost if Act 221 came to an end.

"We should be looking at how to expand this," said David Watumull, chief executive of 'Aiea-based Cardax Pharmaceuticals. He and other speakers said the tax credits helped generate twice as much spending here than their cost to the state.

Jeff Au, managing director of PacifiCap Management Inc., the largest venture capital firm in the state, said cash invested in 177 high-technology companies between 2002 and 2007 totaled $1.2 billion, while the number of credits claimed between 1999 and 2006 totaled about $296 million.

"We have all these data that show positive effects," said Au, who questioned if the state looked at the right measures when examining the effectiveness of the program.

Legislators noted the contrasting views presented by the industry and the tax department and said they will seek more data or another report from Kawafuchi's department. More testimony on the tax credits is scheduled for next Wednesday at the state Capitol.

Kawafuchi's said the state will look to cut investor tax credits over the next two years by narrowing the definition of what constitutes a high-technology company and possibly cutting performing arts from eligibility. It also may expand how it recaptures tax credits should a company move from the state.

Reach Greg Wiles at gwiles@honoluluadvertiser.com.