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Knock Down, Drag Out With Credit Advocates

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By Lowell L. Kalapa

The latest Tax Review Commission is about to wind up its review of the state’s tax structure and present its report to the 2007 legislature.

The constitutionally mandated Commission is appointed by the governor and confirmed by the senate and is charged with evaluating the state’s tax system and recommending revenue and tax policy.

The legislature further defined the Commission’s duties to include a systematic review of the state’s tax structure using such standards as equity and efficiency and the Commission basically has about a year and a half to accomplish this task. Their report is due 30 days prior to the convening of the second regular legislative session after the members have been appointed and confirmed.

While that report has yet to be submitted, it is almost certain the Commission will have something to say about the high technology tax credits. Better known as the Act 221 tax credits, the Commission had consultants take a look at the investment tax credit program under that act which provides eligible taxpayers a nonrefundable tax credit of up to $2 million per investment. Taxpayers who pay the net income or the insurance premiums tax or the bank franchise tax may be able to claim this credit as long as the funds are invested in a “qualified high technology business” or “QHTB” in Hawaii.

The Commission wanted to know if the legislation enacted in 2001 has actually grown the high technology industry in Hawaii and, if so, at what cost. Advocates of the credits in pursing the tax incentive initially made promises of creating jobs that would reverse the “brain drain” of Hawaii’s brightest and best students. Others cited the need to attract investors to Hawaii which has long been known as a “capital short” state. So naturally, Commission members wanted to know if, indeed, the Act 221 high technology investment tax credit had created the highly skilled jobs that advocates promised and did, in fact, the tax credit attract new venture capital from outside the state? 

Unfortunately, one of the problems with the high technology credits, along with many other tax incentives that the legislature has provided in recent years, is that very little information is required of the taxpayer claiming the credit, and for what information is requested, much of it remains confidential because of the state’s compact with the federal government about keeping taxpayer information confidential. 

This was one of the major frustrations cited by the Commission’s consultants. Because they could not access the confidential data and what data they were given was at least a couple of years old, the consultants noted that they did not receive “both the type and amount of timely and usable taxpayer data to measure the costs and benefits of Act 221 credits in the manner in which we had originally anticipated.” 

The consultants go on to say that while the tax credit has raised significant capital for investment in high technology companies, this investment is only an intermediate outcome. They point out that because of the large public subsidy involved, the true test of the effectiveness of the credit is whether or not high technology enterprises are formed and, as viable entities, increase the economic base. 

Realizing the high technology tax credits will not be abandoned by state policy makers, the consultants, citing a national review, recommended that some basic ground rules be adopted including: “(1) conducting cost-benefit studies prior to beginning new tax incentive programs or making awards to firms in targeted sectors, taking into account not just fiscal, but social costs and cost of opportunities foregone; (2) conducting periodic evaluations of all tax incentive programs; (3) requiring sunset provisions; (4) requiring transparency in all aspects – legal basis, economic consequences, and administrative procedures; and (5) utilizing simple, objective qualifying criteria to minimize discretionary application and to ease enforcement and monitoring.” 

The lack of timely and comprehensive data should concern every single taxpayer in Hawaii. As the consultants noted, this tax credit, as well as others, should be treated as an expenditure of public dollars providing a tax break to a select group of taxpayers that comes at the expense of all other taxpayers. 

As one advocate of the tax credit condescendingly noted in support of creating “high paying high technology jobs” maybe those workers getting $18,000 a year enjoy those low paying jobs, or the two or three they have to hold to survive in Hawaii. Obviously he missed the point, it is those workers holding those low paying jobs who are paying the taxes that are underwriting the tax credits that investors are feeding on at the trough. He should be ashamed!

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