State losing
on tax break

Corporate tax refunds
exceed tax receipts by
more than $16 million

By Diana Leone

The state is paying out more money in corporate tax credits than it is taking in, and overly generous tax credits are to blame, Hawaii's tax director said yesterday.

State of Hawaii "Corporate income tax receipts have actually fallen below the amount of tax refunds being claimed by corporations," Kurt Kawafuchi said in a news release. "For the first nine months of this year, $24.6 million in receipts were more than offset by refunds of $40.8 million."

By comparison, last year receipts exceeded refunds by $19.7 million, Kawafuchi said.

Refunds under Act 221, the high-technology tax credit law, do not account for all of the lost income tax, Kawafuchi told the Star-Bulletin but "it's a significant factor."

Lingle wants the Legislature to restrict the benefits in Act 211, which she says will save the state an estimated $55 million over the next two years. Even with changes, Hawaii's credits will be the most attractive in the nation, she has said.

Without changes that narrow what kinds of businesses would qualify for the tax break and reduce their credits for research and development losses, Lingle has said the state's $7.6 billion two-year general-fund operating budget will not balance.

House Speaker Calvin Say has refused to appoint House members to a conference committee to work out differences between House and Senate versions of a bill (HB 1225, SD 2) that includes Lingle's desired changes. Conference committees have until midnight Friday to approve bills.

Say (D, St. Louis Heights-Palolo) could not be reached for comment yesterday, but said earlier this week that the budget will balance without changes to Act 221.

House Majority Leader Scott Saiki said yesterday he is not swayed by Kawafuchi's figures and questions how much of the decrease in income tax revenue is directly due to Act 221.

"We've been asking the tax department this entire session for numbers on Act 221. At one time they gave us numbers but then changed them," said Saiki (D, Moiliili-McCully-Kaimuki).

House Democrats want to keep the tax credit as it is, Saiki said.

"I think the governor's recommendation to amend Act 221 was very rushed," Saiki said.

One reason the tax credit needs adjusting is that the companies that have received the benefit have not created more jobs since it took effect, Kawafuchi said. Those companies actually lost 32 jobs in 2002, compared with adding 30 jobs in 2001 and adding 116 new jobs in 2000, before the tax credit took effect, he said.

Lingle's proposed changes would only grant tax credits for losses in corporate research and development spending, not refunds as can happen now, Kawafuchi said.

The anomaly of plummeting tax revenues in a strong economy appeared to be the result of tax credits being claimed primarily by corporations and high-income individuals, the tax department said.

In contrast, income taxes withheld from individuals' wages increased 1.9 percent -- despite a 5 percent rate reduction that took effect Jan. 1, 2002 -- and excise tax revenues were up by more than 10 percent, it said.

The department generally considers the excise tax, which applies to all kinds of transactions, the single best indicator of economic activity in the state.

The Associated Press contributed to this story.

State Department of Taxation

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