[ OUR OPINION ]
High-tech tax credit
law needs adjustmentDEBATE about the state's high-tech tax credit law has focused on the effect it has had on revenue collections and suspicion that the credit was being used for unintended purposes. That suspicion has been confirmed with the Lingle administration's alarming revelation that as many as 20 percent of claims examined so far may have been fraudulent and that several questionable cases have been turned over to law enforcement.
THE ISSUE
The state tax director has said 15-20 percent of claims under Act 221 may be fraudulent.
Revenue drain is reason enough to tightened the law's liberal language. The exploitation adds further justification for changes.
Act 221, passed in 2001, was meant to be an economic tool to stimulate business growth and generate jobs in technology ventures in hopes of broadening the scope of Hawaii's economy beyond tourism. It permits every dollar invested in high-tech enterprises to be used to lower tax liabilities by the same amount, a generosity the law's critics say harms the state.
Governor Lingle has attributed significant drops in corporate income tax revenues to the law. In its first year, revenue losses were estimated at $45 million, three times more than expected. Earlier this week, Tax Director Kurt Kawafuchi told lawmakers that the state granted $48 million in credits for 2002.
In addition, officials have been unable to quantify jobs and new investment the act was designed to stimulate and questions were raised when one of the first projects to take advantage of the law was a surf movie that filmed in the islands for a short time and did not create permanent employment.
Some claimants may have used Act 221 to reduce tax liability by spinning off tech-related functions of their companies to qualify for the credit. Others simply altered off-the-shelf software to claim the benefits to the tune of $5 million of the $14.5 million the state granted in 2001.
Kawafuchi's calculation that 15 percent to 20 percent of claims could have been illegal may be just the tip of the iceberg because the department has audited only a portion of the claims allowed.
With all of these problems, extending the law for five more years beyond its expiration in 2005 seems irresponsible. Legislators and proponents of Act 221 contend that the law needs no amendment, that marginal claims can be winnowed administratively. Be that as it may, narrowing the scope of eligible businesses, more clearly defining the types of ventures and requiring claimants to report on jobs and the enterprise they are conducting would reduce bureaucratic judgments that could be challenged.
On a smaller issue, the administration should have been more forthcoming in notifying legislators -- and the public -- about the fraudulent claims. When a House member asked state officials why they had not mentioned them before, Kawafuchi and Ted Liu, the director of the economic development department, replied that they were never asked. That kind of information should not be subject to a don't-ask, don't-tell policy.
