[ OUR OPINION ]
Changes necessary
to reduce Act 221 lossesIF ABUSE of technology tax credits is reducing state revenues beyond what can be reasonably sustained, the law should be adjusted. The problem with Act 221, however, appears to be the same as with other state tax credits that extend helping hands without a clear and consistent method of monitoring whether they indeed deliver the desired economic goods.
THE ISSUE Governor Lingle's pitch to amend the state's high-tech tax credit stirs a conflict in the business sector and the Legislature.
The current effort to amend Act 221 has been prompted by the state's projected budget shortfall and the Council on Revenues' assigning the blame for the shortage to tax credits. Governor Lingle, who had previously opposed amending Act 221, now contends that changes are needed to recover $55 million over the next two years, money she hopes to put in her "assets" column to help fund some of her initiatives while balancing the budget.
Act 221, which took effect in 2001, provides a 100 percent tax credit for technology investment. In its first year, revenue losses to the state were estimated to be about $45 million, three times more than anticipated. Exactly how many jobs were created by new investment remains unclear, despite the tech industry's rosy projections as outlined in the column on this page by the director of the Hawaii Technology Trade Association. More recently, state tax officials said that companies claimed $40.8 million in tax refunds while paying only $26.5 million in income taxes in the first nine months of the current fiscal year, naming tax credits in general for the difference.
By their nature, tax credits cut into state revenues, but governments create them in hopes of stimulating economic growth or luring new industry. Some tax credits have expiration dates -- Act 221 is set to end in 2005 -- but extensions are not uncommon. There are no overriding policies or principles that manage their numbers, and governments have done a poor job of assessing their success and financial impact. Through the years, their cumulative effect can pinch off the flow of money, as they appear to have done in Hawaii.
Act 221 had been hailed as groundbreaking legislation, but critics say it is overgenerous, full of loopholes and is being used by many companies merely as a tax shelter. Advocates say it has generated hundreds of jobs and that narrowing the act's research and development segment, as the governor proposes, will stem the flow of investment to Hawaii in precisely the area where there is the best chance for growth.
House Democrats want to leave the credit as is, contending that restraints can be executed through administrative means, but their opposition also may be a bargaining chip in budget negotiations. The state Senate has agreed with the governor that changes are needed.
Government is already generous with tax credits. Most notably, a bill granting a hefty tax credit for developers of a resort at Ko Olina is still under consideration by the Legislature and has the governor's support. Whatever the outcome for the Ko Olina bill or Act 221, the governor should direct her tax experts to conduct a full review and accounting of all credits on the state's books. Assurance is needed that the credits are paying off as intended for taxpayers as well as the enterprises taking advantage of them.
