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The Honolulu Advertiser
Posted on: Thursday, April 29, 2010

Act 221 investors should get their tax break

Hawai'i has big mountainous money problems, but going back on an long-standing promise to business investors is not the way to go.

That promise, to give tax credits in exchange for capital underwriting new technology startups, is known by the shorthand name of Act 221, one of the original laws passed to enable the tax credit in 1999.

Now in the midst of a grueling budgetary crisis, the Legislature has passed two bills, Senate Bills 2401 and 2001. Respectively, the measures block investors from claiming the credits for three years, and end the program altogether next month instead of in December, as scheduled.

SB 2001 offers an tempting escape hatch, but choosing this option is a regrettable, if unavoidable decision. At this point, the program may no longer be affordable, but it should be resuscitated as soon as possible as a key component of the state's economic development policy going forward.

However, allowing SB 2401 to become law is wholly unacceptable, and Gov. Linda Lingle needs to veto this measure.

By no means is this a dismissal of the difficulty in finding another source for the $93 million the moratorium would save. But simply telling investors, "Sorry, you can't count on what we promised for three years, better revise your whole financial plan," would leave an indelible mark on Hawai'i as an unreliable business partner.

The worst-case scenario is that these investors would sue the state over the breach. Even the best case that they would simply turn and walk away is terrible because of the damage done to Hawai'i's already outsized reputation as a horrible place to do business.

Consider who's standing on the other side of the door the state would be slamming. They're investors who have enabled some brilliant innovations in Hawai'i. It's a long list, including Oceanit Laboratories, Hoana Medical, Tissue Genesis, Hawai'i Biotech, Navatek, Blue Lava Technologies and scores more.

Act 221 has many critics, mostly because it's difficult to calculate how much, or little, the state has profited from the investment of foregone tax revenue.

But it doesn't take a rocket scientist to figure out that Hawai'i competes weakly with its rivals for business, and that these credits help to level the playing field somewhat.

The state's urgent budget needs may mean sunsetting Act 221 for a time. But the state must keep its word to the investors who already have money in the pipeline. To rip them off would ultimately be more costly than paying what's owed.