Technology tax credits could cost $1 billion
Honolulu Advertiser, October 24, 2006
Sean Hao

Hawai'i's tax credits for technology investment are likely to cost up to $1 billion in foregone revenues, but it's difficult to say if the state is getting that much in return.

The state tax department reported the $1 billion figure — enough money to pay for one-third of O'ahu's proposed mass transit rail system — at a recent meeting of the state Council on Revenues.

It was the first time the state publicly speculated on how much the credits, implemented in 2001, could cost during their planned 10-year life span.

The Act 215/221 credits were designed to diversify Hawai'i's economy and create high-paying jobs that would keep the state's most talented youths from moving to the Mainland.

Roughly halfway through the program, the cost to taxpayers is becoming significant but the benefits are less obvious.

Hawai'i added a net 350 new tech jobs from 2001 to 2005, according to a state report released yesterday. During the same time, 40,968 total private sector jobs were created. Technology jobs account for about 2.8 percent of total private employment, or 13,813 positions.

"Of course it ($1 billion over 10 years) bothers me because it's a huge amount of money and because I can't justify it," said Senate Majority Leader Colleen Hanabusa, D-21st (Nanakuli, Makaha). "We don't even invest that to repair our schools."

Measuring the impact of the credits is difficult because the state doesn't release the identities of the companies or track the number of jobs they create. It's impossible to know how many new tech-sector jobs would have been generated without the credits.

"There's no way to tie (the credits) to any of the activity that's happening," said chief economist Paul Brewbaker at the Bank of Hawaii. "I don't know why it was designed this way with no accountability. We don't know who is getting the credits, what they're doing, or how much money they're getting."

Since 2001, investors have been able to reduce their state income tax by $1 for every $1 invested in technology companies. An estimated $311 million in credits was given out in four years since the program's start. No other state offers a 100 percent technology investment tax credit.

The tax department estimates that during the next six years, investors will earn roughly $700 million in additional credits.

Individual taxpayers can claim up to $2 million in credits. There is no cap on the total credits the state can give, so it is impossible to know how much the credits will end up costing.

In the year ended June 30, 2005, the program cost an estimated $126.7 million in foregone tax revenue, according to the state tax department.

COMPANIES THRIVE

Supporters of the incentives point out that in recent years, local companies such as Hawaii Biotech, Hoku Scientific and Hoana Medical have grown with help from the credits. They maintain that the cost of the credits is more than offset by the economic activity they generate.

"This tax credit was an attempt to change investor behavior and shake money loose for Hawai'i technology companies," said Ann Chung, vice president of government and community affairs for the Hawaii Science & Technology Council, a trade group representing the technology industry. "If it is a billion dollars, it's an enormous positive reflection on this industry."

Chung's group and other tech industry officials said they will provide more information on the positive impact of the tax credits at a public meeting tomorrow at 9 a.m. at the state Capitol, Room 211.

The first comprehensive attempt to study the benefits of technology tax credits recently concluded the program has been successful in generating $185 million in investment Capital for qualified technology businesses. However, the study also noted that information on the benefits of the program, such as the number and type of jobs created, is sketchy.

The study, by University of Hawai'i-Hilo business dean Marcia Sakai and University of West Georgia professor Bruce Bird, recommended the state create more accountability for the credits, conduct a cost benefit analysis and annually review existing tax credit programs.

Sakai and Bird estimated the technology tax credits will cost the state $600 million over 10 years.

"That's just to give some ballpark figure to show the possible magnitude," Sakai said. "Whether it's really $600 million or not is really a function of how investors behave. It could be higher or lower."

Based on the volume of credits created during the program's first four years the cost of the credits could rise to a total of $600 million, Sakai said.

"There's a need for more transparency as to the effects of tax credits," she said. "Frankly what we need to have is better measurement of the outcome of this program beyond the level of investment."

The report's authors and tech industry advocates agree that it takes time for startup companies to add jobs and that tracking technology job growth is difficult.

Chung said the Act 215/221 credits are helping to diversify the economy, generate attention for Hawai'i and entice residents to invest in local technology companies.

"I know some of that is anecdotal and difficult to quantify, but you do have to look at all those intended goals," Chung said. "You just can't look at the data in a vacuum and say, 'How many jobs have you created?' "

Chung said the state has the information needed to prove the credits are working — the state just needs to compile it and present it.

"The data out there really needs to be put together," Chung said.

Senate Majority Leader Hanabusa added, "There is no transparency in it so you cannot get that information on local job creation. Because of that I think that it's difficult to assess the benefits of it."

MORE TIME WILL TELL

House Speaker Calvin Say said it is too early to assess the benefits of the credits.

"Give it another six years and reflect on that growth in high-tech businesses and if it hasn't been successful, then the Legislature can consider amending it," he said. "At that point whether it's $1 billion or $2 billion, you can stop and say, 'Where are these high-tech jobs?' "

The credits have helped generate about $185 million in investment into Hawai'i companies since 2001, according to the state tax department.

Say said he's confident the program is helping Hawai'i's high-tech sector grow. The investment Capital is spent on research and salaries, Say said.

Others aren't so sure.

Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i, said, "I don't see an explosion of the high-technology industry in the state."

The state should require that companies benefitting from the tax credits disclose the number of jobs created, the salaries paid and the names of companies involved in the program, Kalapa said.

"They're feeding at the public trough. We need to make sure the pigs are getting fatter," Kalapa said. "If they're not getting fatter then why are we feeding them?"

The technology industry has opposed prior legislative efforts to amend the law to require public disclosure of companies benefitting from the credits, saying such disclosures could inhibit investment.