Is Act 221 / 215 boosting Hawaii's high-tech sector?
More data is needed to judge the investment tax credit, but the answer is yes for the research tax credit
THE state has been asking the question: Is Act 221/215 working? As tax professionals, we realize that tax policy questions are not easily answered. Measuring the effectiveness of Act 221/215 requires an understanding of the two distinct credits contained in the law -- the investment tax credit and the research tax credit.
Our state leaders have demonstrated vision and leadership by working to diversify Hawaii's economy and create more high-tech industry jobs. These jobs generally pay more than the median wage and will allow our well-educated work force to stay in the state and thrive.
Act 221/215 uses a two-pronged approach to accomplish these goals. While the investment credit and the research credit work together, they are separate credits designed to encourage separate activities. The investment credit encourages investment in high-tech companies, while the research tax credit encourages investment in high-tech jobs.
MUCH OF the current debate is focused on the investment tax credit. We agree with House Speaker Calvin Say when he says that it is too early to assess the benefit of the investment tax credit.
But what about the research tax credit? The research tax credit is the second and often overlooked part of Act 221/215. This credit has received much less attention in the news media and at the legislature. Maybe this is why so many Hawaii companies may not be aware a credit can be claimed or do not use it effectively.
But in the case of this credit, when we ask, "Is there data available to the state to measure the value of the research tax credit?" the answer is, "Yes."
HAWAII'S research tax credit is a 20 percent credit on wages and other costs related to conducting R&D in the state and mirrors much of the federal research tax credit rules. The credit encourages investment in high-tech jobs by returning 20 cents of every wage dollar to the employer to reinvest in the R&D.
Several economic studies have measured the value of the federal and international R&D tax credits. An August 2002 study published in the Journal of Public Economics found that a 10 percent increase in a research tax credit leads to a 10 percent increase in long-term business research spending.
This data is significant. Hawaii is engaged in a competitive struggle to attract and retain high-tech industry jobs. Most states and many countries offer research tax credits to businesses that locate R&D jobs in those locations. In our global economy, location is less important and many research jobs are highly transferable.
CONSIDER the example of a typical high-tech industry R&D team. The team consists of higher-paid, better educated, technical individuals. These individuals work in a virtual environment. They communicate with each other via e-mail, telephone or video conference. They work independently from many locations around the world and share their work via secure networks.
A team with members on the U.S. mainland, in India and in Hawaii can be just as effective as a team with all members located in Hawaii. The intent of the Hawaii research tax credit is to encourage companies to locate these development teams in Hawaii.
We are competing nationally and globally for these jobs.
SO how competitive is the state's research tax credit?
Hawaii's 20 percent research tax credit was very competitive until the 2004 enactment of Act 215 changed the credit and significantly limited its competitiveness.
The 2004 enactment limited the research tax credit by making the credit available only to qualified high-technology businesses (QHTB). However, many companies engaged in qualified research do not meet the restrictive requirements of a QHTB and are not eligible for the credit.
But, why should it matter what company is providing the jobs we are looking to attract? The research tax credit should be available to all companies engaged in qualified research, as was the case prior to Act 215. This would make Hawaii's credit consistent with the federal, foreign and other state research tax credits.
So let's continue to gather data to measure the value of the investment tax credit. But at the same time, let's use the research tax credit data and studies available today to consider broadening the research tax credit and increase Hawaii's ability to compete for the high-paying research jobs we seek. And if your company is a QHTB, make certain you are using this credit. Hawaii needs more of the high-tech jobs you are creating.
Mark Andrus is a partner and national director of R&D Tax Credit Services for the global accounting firm of Grant Thornton LLP. Alan Schlissel is a tax manager and leads the High Technology Tax practice in Grant Thornton's Honolulu office.