Act 221 gives too much, gets little back


POSTED: Sunday, February 08, 2009

Act 221 is welfare for the rich, with no strings attached. The law, enacted in 2001, provides significant tax credits for people who invest in high technology in Hawaii. The idea was to create more highly technical, well-paying jobs in the islands.

But the intent is not the reality, which has been that the so-called investors can qualify for a handout even if they do not create a single new or permanent job. Some have created jobs anyway, but then moved those jobs to the mainland after pocketing Act 221 benefits.

Act 221 has already cost Hawaii's taxpayers $747 million. The price tag is expected to exceed a billion dollars relatively soon.

Despite this high cost, the public knows very little about the actual effect of Act 221. For example, we do not know how many Act 221 companies have moved away from Hawaii, or the number of the ones that are still viable. We also do not know how many new jobs resulted from Act 221, or how many of those jobs still exist.

The absence of such information has not stopped partisans from declaring Act 221 a success. But the data they cite to back up their claims are incomplete, unreliable, or irrelevant.

For example, a recent “;Gathering Place”; commentary (Jan. 13) claims that 177 Act 221 businesses “;created”; 1,450 full-time jobs in 2007. Yet 1,450 is simply the number of full-time employees working for those particular companies at the end of 2007. Because baseline numbers and similar data from the other qualifying companies are not available, there is no way of knowing the net change in jobs during the year. For all we know, the job count could have gone down.

There also is no way for the public to know how many of the “;created”; jobs are actually the product of mere paper-shuffling. For example, when a bank or insurance company drops its technology employees into a wholly owned subsidiary, the same workers continue to do the same things, but the Act 221 job count goes up.

We know that the average tax assessment on Act 221 audits is about $1 million, but we don't know all the forms of abuse that have been uncovered. We also don't know why only a very small percentage of Act 221 returns have been audited.

The administration should conduct more Act 221 audits, and it should combine and sort data from the Labor and Tax departments to produce reliable job counts for Act 221 companies. Taxpayer-confidentiality rules would be satisfied if the initial data transfer were from Labor to Tax, and if the published information did not identity specific companies or investors.

The public could then see the actual number of jobs created or terminated each year at each (unnamed) Act 221 company. It might be interesting, for example, to know the exact number of such companies that currently have no employees in Hawaii.

Act 221 partisans have passionately fought every effort to bring greater transparency and accountability to this law. They are incredibly well-financed and well-connected with key lawmakers, and their leaders' ability to assemble sign-carrying true believers is reminiscent of Bishop Estate trustees during the early 1990s.

If regular people do not take an interest in this matter, Act 221 supporters will probably get their way: The public will remain in the dark and the welfare will continue to flow.


Randall W. Roth is a professor at the University of Hawaii Richardson School of Law. He specialized in taxation, trusts and estates.