State to delve benefits of tech tax break

The controversial Act 221 tax credits have cost the state more than $110 million in revenues

For the first time since it began offering high-tech industries millions of dollars in tax credits, the state will conduct a study to find out if the investment is paying off.

The analysis, planned to be released in a few months, will look at the number of companies, types of jobs and salaries created under the tech sector since a law known as Act 221 kicked in four years ago.

Raising doubts about how much the law has helped, a report this week showed Hawaii stuck for the past six years at 47th in the nation in terms of high-tech jobs.

Act 221 allows individuals and companies to get a 100 percent return over five years on investments of up to $2 million made in Hawaii-based high-tech companies. Since 2001, the credits prevented the state from collecting more than $110 million in tax revenues.

Although high-tech jobs have gone up, experts say there isn't enough data or research available to evaluate the costs and benefits of tax breaks.

"There's no standard definition of high technology. So what we are trying to do is put together something that makes sense for us," said Bob Shore, a state economist. "There are different ways to count."

For example, the survey that repeatedly ranks Hawaii's tech industry so low, with just 13,500 high-tech positions, accounts for just a "slice of the tech market," focusing on software, computers and gaming, according to Alex McGehee, executive vice president for Enterprise Honolulu.

McGehee said the survey by the American Electronics Association didn't include jobs such as biotechnology, diversified agriculture, and film production.

"That adds about 15,000 jobs to that figure," McGehee said.

The state report comes as lawmakers are considering bills this session to keep credits flowing to high-tech companies.

One of the measures, the Hawaii Innovations Partnership Act, calls for a $100 million fund to help jump-start companies in advanced technology, life sciences and renewable energy.

Ann Chung, vice president for Hawaii Science & Technology Council, said the incentive will be critical for emerging companies to expand, hire more islanders and ultimately diversify Hawaii's tourism economy.

Without state help, she said, the companies probably would move to the mainland to attract more investments.

"In order to avoid that, we need help," Chung said. "What it will take is really concerted leadership."

Among those lobbying against the bill is Lowell Kalapa, president of the nonprofit Tax Foundation of Hawaii, who compared the program to giving away money. He said "taxpayers should be outraged" to see the state supporting programs that help so few people.

"That's like going to Vegas and putting money in the slots," he said. "Nobody has looked at what benefits the investments have brought."

Sen. Willie Espero, a sponsor of the Hawaii Innovations Act, agreed that it's difficult to pinpoint how many companies may have survived solely because of the credits. But he said there's some evidence that high-tech markets are slowly emerging.

"It appears that we are making small steps forward," he said. "The question is, 'How can we maintain the Act 221 momentum?'"

But Paul Brewbaker, chief economist at Bank of Hawaii, said the state is taking risks when it funds companies that can't be supported elsewhere.

"If companies in development have difficulty raising capital in the equity market, venture capital market, not to mention the traditional loan arena, then that should tell you something," he said.

"It says that maybe the idea hasn't arrived."