Report on tech tax credits comes under fire
A recent draft report on the effectiveness of the state's high technology tax credit has elicited a hail of complaints from technology executives for what they say are oversights, ill-informed inferences and a failure to consider intangible benefits from the credit.
The criticism has been so intense that the state Tax Review Commission, which called for the report, has pushed back the deadline for the report's final version and is seeking to schedule meetings with the executives.
But despite their complaints about last week's draft report, several high-tech executives say they agree with one of its overarching points: There is not enough public information available to assess the tax credit program, known as Acts 221 and 215.
The tax credit "has to be more transparent while still protecting the privacy of the companies and investors," said Ian Kitajima, a spokesman for Oceanit Laboratories Inc. and its spinoffs Hoana Medical Inc. and Nanopoint Inc. "I think most people agree. They need more information. Otherwise, we get what we got in terms of the study."
Ann Chung, vice president of the Hawaii Science & Technology Council, the industry's main association, concurred.
"I think the industry and the (Hawaii Department of Taxation) need to figure this out," Chung said. "We need to have an analysis that is reflective of the true benefits and the costs."
"I couldn't agree more," said David Watumull, chief executive of Cardax Pharmaceuticals Inc. and former chief executive of Hawaii Biotech Inc. "They really do not have enough information to reach any conclusions."
The comments show a largely obscured degree of common ground among industry executives and the authors of the draft study. The study's authors -- Marcia Sakai, dean of the University of Hawaii-Hilo's College of Business Administration, and Bruce Bird, a professor of accounting and finance at the University of West Georgia -- offer no formal conclusions in the draft. A main point of both the written draft and an oral presentation was that there is not enough information available to assess the program's costs or benefits.
For example, the study notes that between 2000 and 2003, the state gave out $185 million in credits. But how much Hawaii has given up in recent years is one of many unknowns.
The Act 221/215 tax credit program provides a 100 percent tax credit for investment in qualified high-tech businesses. Although the acts also provide credits for research and development, those were not part of the study.
Sakai and Bird had been scheduled to submit a final report this coming Monday. But amid the storm of criticism, Isaac Choy, chairman of the Tax Review Commission -- which is charged with analyzing the effects of state tax policies -- said the panel will give its consultants until the end of the month to finish the report.
In the meantime, Choy said he hopes to schedule a meeting during the week of Oct. 23 with technology executives and financiers who work with them.
To be sure, there are potential stumbling blocks. For example, there's no formal consensus on what information should be made public or on the criteria for measuring the effectiveness of the credits. Still, the need for more data seems clear to people on both sides of the debate.
Bill Spencer, president of the Hawaii Venture Capital Association, said one problem involves the state Department of Taxation's lack of resources to measure job creation and other indicators. Kurt Kawafuchi, the department's director, has acknowledged this problem.
Sakai and Bird also noted what they said were problems with tax forms that made them hard to use to gather statistics.
In addition, Spencer said the data should be released in a way that maintains privacy for companies and investors.
Finally, Spencer said, it would be unfair to judge the program's effectiveness now because it could take years for companies that are benefiting from the tax credit to mature. He said judgment should be reserved until 2009, when the acts come up for renewal.
The Tax Review Commission has pointed to this time lag as a cause for concern. In a 2003 report, the commission wrote that "a tax incentive is a potential 'black hole' because it is a future benefit of unknown proportions, which is determined by the favored taxpayer's interpretation of what the tax credit should be, and is claimed on a return which is confidential."
Choy said the need for accountability is urgent.
"We're talking about spending an average of $60 million a year. And this is tax dollars; this is your tax dollars," he said. "We need more disclosure. We need the industry to come forward with the statistics."
Given the lack of public data, policymakers and citizens have been required to make decisions based largely on information provided by tech companies and their lobbyists on one hand and critics of the program on the other. Sakai and Bird's draft report stopped short of fully quantifying either the costs or benefits.
Local tech executives have taken issue with what they call a poor use of available data in the report. For instance, Sakai and Bird published results from a national venture capital study that showed relatively little investment by institutional venture capital investors in Hawaii at a time when the state granted tens of millions of dollars in tax credits to people and companies that had invested in local technology firms.
In an interview, Sakai acknowledged the national venture capital study was flawed because it would not have accounted for the small, so-called angel investment that makes up much of the money that goes into Hawaii companies.
Regardless, Choy said a study is needed.
"As long as the people of Hawaii receive a benefit from this (tax credit program), of course we'd be more than willing to support something like this," he said. "But is this credit worth it? That's exactly what I want to find out. And I think the jury's still out on this."
