High-tech tax credit
reforms appear doomedDemocrats call the state's high-technology tax credit, known as Act 221, the only measure that has attracted investment and helped diversify the local economy.
Republicans call it a well-intentioned law that must be amended to curb alleged abuses and protect the state from gaining a reputation as a haven for tax shelters.
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As the two sides called rival news conferences on Tuesday, House and Senate conferees working on the state's financial plan went about balancing the budget without considering the reforms, which Gov. Linda Lingle contends would stem a $55 million drain of state revenues over the next two years.
Also contributing to the measure's likely demise is the House leadership's refusal to appoint conferees to discuss the amendments, which have been adopted by the Senate.
"We're not going to reverse our course on diversifying the economy," said Rep. Brian Schatz (D, Tantalus-Makiki), chairman of the House Committee on Economic Development and Business Concerns.
"They (the Lingle administration) seem to be blaming the tech industry for a decrease in corporate tax revenues," he said, noting that various other tax credits contribute to a downturn in revenue.
In a news release issued Saturday, the state Department of Taxation said corporations claimed $40.8 million in tax refunds while paying only $26.4 million in income taxes during the first nine months of the current fiscal year.
The Tax Department already has issued what is known as a tax information release, or TIR, meant to address administrative shortcomings that have been blamed for some companies taking advantage of Act 221's broad wording to reap substantial tax breaks.
The state Tax Review Commission noted this year that investors in the surfing movie "Blue Crush" received at least $18 million in tax rebates, more than all other technology companies combined.
But state Tax Director Kurt Kawafuchi said he does not believe the TIR goes far enough.
"It's a step forward, but there's still a lot more room to go to improve Act 221, to tighten it and fine-tune it," Kawafuchi said Tuesday. "We need statutory changes."
Republicans insist that even with the proposed changes, Act 221 still will be the nation's most generous tax credit for high-technology investment.
It allows backers of qualifying companies to claim 100 percent tax credit on their investment over five years.
Lingle has proposed that a separate "research and development" tax credit be applied in the same way as a similar federal tax credit -- so it is only applied to the growth in research and development, not on the total amount that has been spent by a company.
Opponents say that would essentially gut the law.
"One of the goals is to build a technology business here that's based on technology research and development," said Mike Fitzgerald, president and chief executive officer of Enterprise Honolulu, an economic development organization.
"In the long term, it's the R-and-D aspect that is probably the most likely of what we're going to hold here," he added. "Once a company actually makes a product, we're going to have a very difficult time competing to have the manufacturing done here."
Republicans say Democrats appear to be playing politics with the proposals. "I, along with everyone else in the Republican caucus and many good Democrats, support Act 221," said Senate Minority Leader Fred Hemmings (R, Lanikai-Waimanalo). "We supported it during the election, but we don't support what we've now found out subsequent to the election: that the system is being abused and we could save a lot of money that could stay here in Hawaii."
Even with a deadline of tomorrow for all fiscal bills to be in their final form before going to the chamber floors, House Minority Leader Galen Fox urged House leadership to reconsider: "We're just asking for the parties to come together and improve Act 221, make it a better vehicle for attracting high tech. We'd like Hawaii to be the Silicon Valley of the Pacific, not the Grand Cayman Islands of the Pacific."
