Budget crunch spotlight
falls on high-tech tax credit
By Richard Borreca State Tax Director Kurt Kawafuchi is privately warning legislators that state tax collections could slip by more than 1 percent, which could mean $30 million less for the budget.
rborreca@starbulletin.comThe news comes as the Lingle administration has mounted a full-scale public-opinion campaign to cut back the tax benefits of Act 221.
The two items are linked because the high-tech tax credits from Act 221 cost the state an estimated $55 million at the same time the state is not collecting as much money as expected.
"Please recall that the Council on Revenues' most recent forecast of 4.3 percent assumed a 5.7 percent growth rate for the last four months (of the current fiscal year). Thus, we are currently at roughly a 3 percent growth rate rather than a 4.3 percent growth rate," Kawafuchi told key legislators in an e-mail yesterday.
He noted that the current Tax Department estimate for April tax collections is "basically flat when comparing April 2003 to April 2002."
Yesterday, Gov. Linda Lingle called on three local high-tech venture capital experts who were critical of how Act 221 is being used. The news conference came after a highly critical release from the Tax Department issued Saturday said tax credits were causing tax revenues "to plummet."
The act, passed two years ago, is a set of tax incentives aimed at getting more investment in new local high-tech firms. While Lingle had been a strong supporter of the law, she said she now has concerns that the law is being abused by firms that are not generating new jobs.
Her criticism came after the Council on Revenues had said it was concerned about how much tax money the state was losing from the tax credits.
Barry Weinman, managing partner of Allegis Capitol, and Tareq Hoque, former president of AdTech and the 2002 chairman of Hawaii Technology Trade Association, told reporters yesterday the state is being taken for a ride with Act 221.
"People are milking Act 221," the pair said.
"Wealthy individuals and institutions are positioning themselves to stop paying state taxes for years to come.
"In its current form, Act 221 is a colossal waste of money for taxpayers," the pair warned.
Weinman added that Hawaii companies created through Act 221 will be viewed as being simply tax shelters.
"I hope the Legislature takes responsibility and changes this act," Weinman said.
But the Legislature is divided on what to do.
The Senate agreed last week with Lingle's recommendations on how to fix the act, but House leaders will not discuss any changes.
House Speaker Calvin Say said the new law has not been in effect long enough to know how much it is helping or hurting the state.
Rep. Brian Schatz (D, Tantalus-Makiki) says the law works and has resulted in $250,000 in technology investment.
Tax Director Kawafuchi, countered, saying the tax credits are being claimed by "non-high-tech companies to upgrade their technology and improve processes."
The problem for the Tax Department is that the tax credit claims are unpredictable, and sometimes corporations wait for a year before claiming the Act 221 tax credits.
State of Hawaii
