No way to tell if tax credit is doing its job, consultants say

Consultants commissioned to analyze a technology state tax credit said yesterday there simply is not enough data to determine how well the program is doing its job of stimulating economic development and helping to diversify Hawaii's economy.

Although Acts 221 and 215 have generated investment in technology enterprises, it is not clear whether they have done enough to justify giving up nearly $200 million in taxes so far, said Marcia Sakai, dean of the College of Business and Economics at the University of Hawaii-Hilo, and Bruce Bird, a professor of accounting and finance at the University of West Georgia.

Sakai and Bird presented their preliminary findings yesterday before the Hawaii Tax Review Commission, which had commissioned them to do the study.

Although Sakai and Bird showed some data suggesting that Acts 221/215 have been effective in creating new technology jobs, other data that Sakai and Bird found appeared to belie that finding.

For example, Bird pointed to information from the Hawaii Department of Taxation indicating that in 2002, 131 qualified high-tech businesses reported employing 2,209 workers. In 2003, 78 qualified high-tech businesses reported employing 1,980 workers.

Bird said he had inferred that the businesses had filed their reports only in the years in which they had received qualified investments, which would mean that the legislation had spurred the creation of nearly 4,200 new jobs.

However, jobs data provided by the Department of Business, Economic Development & Tourism show tech employment in the state steadily declining during the same period, from 13,463 in 2001 to 13,104 in 2003.

Bird said several factors could explain this discrepancy. One hypothesis, Bird said, is that companies that already were doing business in Hawaii simply got certified as high-tech businesses and got tax credits, even though they weren't creating any new jobs. But Bird said the Department of Taxation had not provided enough data to enable the consultants to be certain.

In addition, Bird said the apparent practice of companies reporting jobs data to the tax department only in years in which they received investments meant that analysts could not track the performance of these companies.

Sakai said it was essential to have ongoing data, because many Act 221/215 companies are young firms whose success must be measured over time.

Under Acts 221/215, Hawaii grants 100 percent tax credits for investments in qualified high-tech companies, which include things like firms that make computer software and alternative energy fuels, as well as performing arts productions, such as movies and television shows. The credits are paid out over five years.

Between 2000 and 2003, the program generated $185 million in tax credits. Of that, taxpayers have claimed $74.9 million.

Despite the large outlays of tax credits, tax department officials have said they are restricted by privacy laws from releasing detailed taxpayer information that could help policymakers and the public assess the program's effectiveness.

Sakai said yesterday that the program should be held to the same standard as government spending programs, which must provide evidence of their effectiveness. Although tax credits are technically not the same as government spending, they serve the same effect because the government gives up tax money that could be used for other public purposes, Sakai said.