A conflicted state Senate, under threat of potential lawsuits, voted yesterday to end a high-technology tax credit program early and temporarily suspend investors' ability to claim the credits to help with the state's budget deficit.

Scaling back the high-tech tax credits was among the last planks lawmakers used to balance the state's $10.2 billion budget and six-year financial plan and close a $1.2 billion shortfall through June 2011.

The state House had already agreed to curtail the high-tech tax credits —known as Act 221 — and was waiting on the Senate. The Senate voted 14-11 to end the tax credit program in May, instead of December, which would save the state $13 million. Senators, by an identical margin, also voted to suspend investors' ability to claim high-tax credits for three years, saving $93 million next fiscal year and millions more in the following years. A tax credit for research activities would be extended for one year.

Investors have argued that suspending the high-tech tax credits is unconstitutional under the due process clause of the Fifth Amendment because the investments have already been made. The tax credits can be taken over five years — and unused credits earned before May 2009 can carry forward — so the credits will remain alive even after the program ends.

State Sen. Donna Mercado Kim, D-14th (Hālawa, Moanalua, Kamehameha Heights), the lead Senate budget negotiator, said lawmakers resisted a broad-based tax increase to balance the budget but had to make some unpopular decisions.

"Do I like everything in this budget? No. Am I happy that we had to do some of the things we had to do? No," she said. "But that's reality.

"We don't all get everything. Government cannot be everything to all people."

Kim said state Attorney General Mark Bennett does not believe restricting the high-tech tax credits is unconstitutional , a view challenged by several lawyers for investors, including former state Attorney General Margery Bronster.

Other senators said suspending the high-tech tax credits will expose the state to investor lawsuits, undercut the state's growing technology and entertainment sectors, and send a message nationally that Hawai'i is a risky place to invest.

"Who is going to want to invest in Hawai'i? Where will any of our businesses find investment capital?" said state Sen. Rosalyn Baker, D-5th (W. Maui, S. Maui). "One has to wonder, if Act 221 can be disavowed today, what program will the state of Hawai'i renege on tomorrow?"

State Senate President Colleen Hanabusa, D-21st (Nānākuli, Mākaha), said the budget the Senate and House approved yesterday protects public education and social services from more severe spending cuts.

State Rep. Marcus Oshiro, D-39th (Wahiawā), the lead House budget negotiator, said he supported the budget "not because I like the cuts that we made, but because of what cuts we did not make and the programs and services we were able to save for now."

State Sen. Sam Slom, R-8th (Kāhala, Hawai'i Kai), was the only senator to oppose the budget. All six House Republicans voted to approve the budget. But House Minority Leader Lynn Finnegan, R-32nd (Lower Pearlridge, 'Aiea, Hālawa), said Republicans felt more steps should have been taken to "live within our means, to not increase taxes because we felt that when the economy slows down and our tax revenues are less, that represents what's happening out there."

KEY VOTES TODAY

Along with restricting the high-tech tax credits, the Senate voted to cap itemized state tax deductions on the wealthy, which could save the state about $30 million a year. The House and Senate also voted to siphon $46 million from special funds to help balance the budget.

Yesterday, lawmakers moved through most of the bills that were still pending this year. Key votes are planned for today on tapping the state's hurricane relief fund to reduce teacher furloughs and potential veto overrides are expected tomorrow on the last day of session.

Lawmakers voted to put a state constitutional amendment on the November ballot asking voters whether they want an appointed state Board of Education. The governor would appoint the school board from candidates screened by an advisory panel. The appointments would be subject to Senate confirmation.

Many lawmakers believe an appointed school board, instead of the elected board in place since 1964, may establish greater lines of accountability over education policy.

Some school board members and the Hawaii State Teachers Association, however, have said an appointed board would give too much power to the governor. Other educators do not see a link between the school board's structure and student achievement.

In the House, several lawmakers who opposed the idea were from the Neighbor Islands. State Rep. Joseph Souki, D-8th (Wailuku, Waihe'e, Waiehu), said allowing the governor to appoint school board members would place too much authority in the hands of a single individual in a state that is already too centralized.

Gov. Linda Lingle had wanted a constitutional amendment to give the governor the power to hire and fire the state schools superintendent, but that responsibility would still rest with the school board regardless if it is appointed or elected.

Lawmakers also voted to ensure that students have a minimum number of classroom instruction days and hours, a requirement that would expand over several years. The bill is in response to teacher furloughs that have left Hawai'i with the lowest number of instructional days in the nation.

Lawmakers also voted to raise the salary cap for the schools superintendent from $150,000 a year to $160,000 with performance bonuses that could over time bring the salary to $250,000.

FIREWORKS, SHARKS

The House and Senate gave final approval to two bills that have had emotional and cultural resonance this session. Lawmakers voted to give counties the option to ban fireworks, and prohibited the possession and sale of shark fins.

Honolulu Mayor Mufi Hannemann has said he favors restricting fireworks on O'ahu, the largest market for the fireworks industry. A task force will also study how to contain the illegal fireworks imported into the state.

State Rep. Jon Riki Karamatsu, D-41st (Waipahu, Village Park, Waikele) opposed the bill and said most fireworks complaints are tied to the lack of enforcement of existing state law. Consumer fireworks are allowed on New Year's Eve, Chinese New Year's Day and the Fourth of July, but many residents complain about fireworks displays outside of these holidays.

Shark finning is already illegal in Hawai'i but lawmakers wanted to ban the possession and sale of shark fins to deter a practice many animal-rights and environmental activists believe is cruel. Many Native Hawaiians also consider the shark a cultural deity.

Restaurants that serve shark fin soup, a Chinese delicacy, would have until July 2011 to use the shark fins in inventory. State Sen. Clayton Hee, D-23rd (Kāne'ohe, Kahuku), who is of Hawaiian and Chinese descent, said it is inhumane to sacrifice millions of sharks worldwide "all for the indulgent practice of eating a bowl of soup."

Lingle, as expected, vetoed a bill yesterday that would increase the barrel tax on petroleum products from 5 cents to $1.05, which would generate $22 million a year that lawmakers want to help with the deficit and to finance food and energy security programs.

"The bill deceptively purports to use funds generated from the tax increase to promote energy and food security in the state, but in reality, over half of the money raised by the tax would be diverted for general government operations rather than reducing our dependence on imported oil and food," the governor's news release said.

"The tax increase would raise the cost of living and increase the cost of doing business in the state by making virtually everything more expensive, including electricity, gasoline, trucking, shipping, retail goods, food, public and school buses, and even the propane for backyard" barbecues.

Lingle also vetoed a bill that would block a reorganization plan at the state Department of Human Services that would close most eligibility offices statewide and consolidate application centers in Honolulu and Hilo.

The bill would prevent the state from closing the eligibility offices on the Neighbor Islands but allow a pilot project in Honolulu.

Lingle signed a bill to increase taxes on cigarettes and little cigars that could bring in about $10 million a year to help with the deficit.

VETO OVERRIDES

Lawmakers expect to consider veto overrides either today or tomorrow, the final day of the 60-day session. Lingle has 45 days to veto bills passed near the end of session, such as the suspension of the high-tech tax credits, and lawmakers can choose to come back for a one-day override session in July.

State House Speaker Calvin Say, D-20th (St. Louis Heights, Pālolo Valley, Wilhelmina Rise), usually prefers not to hold summer veto override sessions in election years. The composition of the Senate — where several lawmakers are running for higher office — also could change before July.

Investors will have to wait to see whether the bill restricting the high-tech tax credits becomes law before deciding whether to sue. They will likely shift their lobbying campaign from lawmakers to Lingle, who has called for tightening the high-tech credits in the past. Lt. Gov. James "Duke" Aiona has disagreed with Lingle.

Jeffrey Au, the managing director of PacifiCap Management Inc., said investors will ask the governor to veto the bill. "Right now, we hope that the governor will veto this bill as soon as possible before the uncertainty it creates does more damage to Hawai'i's credit ratings, investor confidence and long-term business reputation, in addition to our local businesses and investors," he said in an e-mail.