COMMENTARY
Tech credit's value lost in flawed analysis
By Mike Fitzgerald and Bill Spencer
In 2001, the state adopted Act 221 to stimulate capital investments in Hawai'i technology companies, thereby accelerating the growth of our local tech industry. Hawai'i investors, accustomed to investing in real estate, established ventures, or out-of-state, had very little if any interest in making investments in local tech start-ups. Frustrated tech entrepreneurs increasingly left Hawai'i to launch start-ups or were forced to relocate to areas with greater access to capital.
With the collapse of both the Japanese and dot-com bubbles, visionary lawmakers recognized the long-term importance of this industry in diversifying Hawai'i's economy and creating high-paying jobs. To induce investors to fund high-risk local tech start-ups, fundamentally required changing mindset and behavior. This required something bold, compelling and exceptional. Act 221 (later updated in 2004 as Act 215) provided a 100 percent tax credit over five years for investors in qualified high-tech businesses in Hawai'i, as well as other incentives for these tech companies. It immediately drew global recognition to Hawai'i.
On Oct. 6, 2006, a draft study commissioned by the State's Tax Review Commission was presented by professors Bruce Bird and Marcia Sakai. The study, focused on the investment tax credits, uncovered some promising data on significant investment and job growth already being realized.
But this positive data was lost in interpretation.
The way the data were interpreted, the multiple contradictions, and how the study was conducted, does not meet the level of accuracy and objectivity required in a responsible analysis. The professors themselves acknowledged inaccuracies and limitations regarding their findings and their omission in failing to talk to the basic participants of Act 221/215.
Industry members agree that a study on the tax credits should be done. Understanding its effectiveness is important to everyone. But such a study must be accurate, objective, adequately consider both quantitative and qualitative factors, clearly establish criteria for effectiveness and directly address issues related to law's intent.
The study contained multiple instances where the authors drew conclusions contradicting their own data:
The study's authors failed to recognize and consider one of the most important benefits of this law: It has succeeded in changing investor attitudes and behavior — causing fundamental changes in Hawai'i's tech environment. Compared to 2001, not only has the number of investors increased dramatically, Hawai'i now has expanding angel networks on multiple islands, more venture funds, more tech accelerators and incubation space, and a visible increase in the community's interest and experience investing in Hawai'i technology.
The study also failed to consider other benefits meeting the law's intent, such as increasing Hawai'i's tech visibility, improving the state's business image, preventing relocations thus retaining jobs, revenues, and skills, and the expanding knowledge and indirect jobs and taxes generated by local supporting service providers to Hawai'i's tech industry.
One goal specifically contemplated by the Legislature was to attract capital from Mainland, foreign, and tax-exempt sources by permitting the allocation of credits from their investments to Hawai'i taxpayers. Act 221/215 has fostered these new sources of capital. The professors failed to include this obvious benefit in their analysis.
And while the study's authors focused on the number of jobs produced, they failed to give sufficient weight to the types of jobs being created. In comparison to 100 hospitality jobs with an annual average wage of less than $25,000, the same number of tech jobs with $50,000-plus annual average salaries is undeniably of greater economic value. Not only has Act 221/215 produced high-paying jobs with the skills demanded in the global economy, it also has enabled hundreds of kama'aina to come back home — tangibly beginning to reverse Hawai'i's "brain drain."
The community deserves a more comprehensive and thoughtful analysis, and to achieve this requires collaboration between private and public sectors. Industry is committed to working together on a more meaningful effort.
Mike Fitzgerald is president of Enterprise Honolulu, and Bill Spencer is president of the Hawai'i Venture Capital Association. Ann H. Chung, vice president of the Hawai'i Science & Technology Council; Lisa Gibson, president of the Hawai'i Science & Technology Council; and Rob Robinson, convener of the UH Angels contributed to this article. They wrote this commentary for The Advertiser.
