Another viewpoint
Another viewpoint
New cost information
shows need for changes
in Act 221The state Council on Revenues recently adjusted downward by $118 million the amount of tax revenue the state of Hawaii can anticipate between now and June 30, 2005, the end of the biennium.
This adjustment has nothing to do with the economy or impact of war in Iraq.
Aided by actual data from the past few months, Council on Revenues members now believe that the impact of tax-credit legislation, such as Act 221, will be much greater than had previously been taken into consideration in forecasting revenue -- $118 million greater, to be exact.
By law, these forecasts cannot be ignored.
Budget must balance
The Legislature now must factor this $118 million shortfall into a budget that it must pass by the end of this session. Thus far, the Legislature's Democratic leadership has focused primarily on two options: (1) raiding the Hurricane Relief Fund, and (2) increasing the state excise tax.Convinced that neither of these approaches would be good for the people of Hawaii, Governor Lingle has recommended other ways to balance the budget. By far the most controversial recommendation is that Act 221 be modified. Act 221 gives tax breaks and tax credits to firms investing in Hawaii high-technology projects.
The money at stake is substantial. Based on the Council on Revenues estimates, the governor's proposal would save $55 million over the next two years.
Members of the hi-tech community and a handful of legislators have reacted negatively to this proposal, accusing the governor of trying to "gut" Act 221 and devastate Hawaii's chances of developing a viable hi-tech business sector.
This is not true and ignores the facts.
Lingle supports Act 221
Governor Lingle supports the powerful Act 221. The governor has long supported efforts to stimulate investment in hi-tech businesses in Hawaii, and she wants Act 221 to continue to be a powerful tool for making that happen.Even after taking into account the recommended changes, Act 221 would still be the most generous tax credit in the country. Investors in qualifying hi-tech companies would continue to qualify for a 100 percent tax credit over a five-year period. The next highest investment tax credit in the country is 50 percent.
Also still in place would be the Act 221 provision for special allocations. So even non-resident investors who don't pay taxes in Hawaii can continue to benefit by investing in Hawaii companies.
Recommended changes
The three specific changes recommended by the governor all make sense.
>> The first is to delete language that mandates liberal construction. This unique feature reportedly has prompted some investors and their tax advisers to take what the Tax Department considers overly aggressive positions on their tax returns. Like other laws, this one should be interpreted reasonably. It makes no sense to intentionally tilt the playing field, especially given reports of abuse.The federal government allows the credit only on increases in research spending, not on the same spending year after year. And the federal credit is available only to companies that would otherwise be paying taxes. As currently structured, Act 221 allows companies to get a check from the state of Hawaii for the amount of the credit even if they have never paid a Hawaii tax and never will.>> The second proposed change is to spell out that the 100 percent credit was never intended for one-shot movie deals. (The state used Act 221 to give away $14 million in tax credits for the 2002 film "Blue Crush," which cost $32 million to produce.) The whole idea of Act 221 is to promote industry growth and stability.
>> The third change suggested by Governor Lingle is that the existing 20 percent research credit be restructured to follow federal law. Currently under Act 221, companies can claim a refundable 20 percent credit from the state for research expenditures each year, without limit, even if they are not growing or generating revenue.
New information
Critics point out that Governor Lingle expressed support for Act 221 during her campaign and said then that any problems with it presumably could be dealt with by writing new regulations or stepping up enforcement activities, and not by changing the statute.The question is, what is a governor to do when she is given new information about an important issue? Should she ignore that new information, or should she take it into account in deciding what is the best thing for the people of Hawaii?
Now that the Tax Department has uncovered specific abuses, and the Council on Revenues has determined that Act 221 is far more generous and expensive than had previously been realized, it just makes sense to take another look at it, especially in light of a huge budget shortfall.
Governor Lingle would rather modify Act 221 than raid the Hurricane Relief Fund, increase excise taxes, lay off workers, or reduce funding for core functions of government.
Critics should be asked to identify exactly how they would balance the biennium budget, and to explain how Act 221 could be "gutted" and still be by far the most generous tax credit in the nation.
Randall W. Roth is senior adviser to Gov. Linda Lingle.