Lingle seeks reforms Some say it's a law that invites corruption at a hefty price tag to the state. Others say it diversifies the economy and fuels interest in the islands.
to high-tech tax credit
She wants to ensure a long-term
benefit to Hawaii's economyBy Matt Sedensky
Associated Press
It is the hotly debated Act 221, the state high technology tax credit Gov. Linda Lingle has targeted for reform after it enabled backers of Hawaii-shot films like "Blue Crush" to reportedly collect millions of dollars in state funding.
For all the publicity film studios' use of the credit has garnered, though, they represent only part of what the act supports.
The state Department of Taxation says about 150 companies have benefited from Act 221, which was passed in 2001, and similar credits that went into effect in 1999.
Most of the companies -- 76, by the state's count -- are involved with computer software. Just 17 fall in the performing arts category. Other participating businesses include those working in astronomy, non-fossil fuels and ocean sciences.
Where the controversy enters is how much Hollywood is collecting and whether the movie productions benefit the state the way recipients of Act 221 credits were intended to.
Lingle administration officials say "Blue Crush" got $14 million in credits, though numbers for that surfing movie cannot be verified because the law prohibits public release of individual tax information. That means it's also unclear which of the dozens of films that have come to the islands in recent years have filed for the credit and how much they've received.
Lingle's proposal for a revised Act 221 -- a plan she says would temper unintended use and head off the need for deep cuts in education and social services -- has so far been beat back in the Legislature.
The state Senate last week opted, instead, to increase the state excise tax to help offset a projected $67.1 million shortfall in the two-year, $7.6 billion general fund operating budget.
But reform of Act 221 isn't dead yet and could resurface in committee.
Act 221 was meant to stimulate investment in island high technology businesses. Backers of qualifying companies can claim 100 percent tax credit over five years on their investment, essentially meaning the state foots the bill for the taxpayer's stake in the business.
"It's basically a bribe to get firms to come here," said Sumner La Croix, a professor and chairman of the economics department at the University of Hawaii. "This is such a free ride."
Lingle administration officials say no other jurisdiction offers such a generous write-off. The closest, they say, is a New Jersey state credit that offers a 50 percent credit for high-tech investments.
The generous credit apparently is attracting investment.
In 2001, the state received 268 claims under the act totaling $46 million -- nearly three times as much as state officials anticipated. The tax credit is spread over five years, meaning the investment credit reduced tax revenues by $9.6 million in 2001.
But the governor is not proposing changes to the investment tax credit. She is calling for a closer look at who should qualify. As written, Act 221 mandates liberal interpretation of what projects qualify; Lingle wants such language deleted.
Lingle also wants to curtail a provision of Act 221 that allows deductions for research and development. The Department of Taxation said companies saved another $9.8 million on their taxes under that credit in 2001.
The governor also seeks to clarify that the credit was never meant to benefit one-time movie deals, but rather to stir the creation of film companies or other projects that "would continue to contribute to Hawaii's economy and continue to provide good jobs," as her senior adviser, Randall Roth, explained.
The effect, Roth says, will not negatively impact the allure of the islands to filmmakers.
Others are not so sure.
"I don't expect to see as many films made here," said La Croix. "But it's being made with yours and my money."
Meteliko Tuaileva, head of production for the Hawaii Pacific Cinema Development Foundation, says the proposed changes to 221 will likely have little effect on major studio productions, like 20th Century Fox's filming of "Planet of the Apes" on the Big Island. But Tuaileva, whose nonprofit works to bring television and movie projects to Hawaii, said the changes could sway independent producers from filming here.
No one seems to dispute the credits have earned Hawaii some attention.
"We've received a lot of calls from people on the mainland that thought that it was a misprint when they saw that the credit was 100 percent," said Roth.
Even without changes in the law, the Department of Taxation has announced plans to crack down on Act 221 abuse. Tax officials vowed to develop an audit program intended to target abusive claims. And officials there said a more extensive state tax form to claim the credit would likely be released in the next week -- and be required even for those who've already filed 2002 returns.
Office of the Governor