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Aiona preserves high-tech tax credits

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Lt. Gov. James "Duke" Aiona vetoed a bill yesterday that would have prevented investors from claiming high-technology tax credits for three years to help with the state’s budget deficit.

Investors had threatened to sue the state if the tax credits popularly known as Act 221 were suspended. Investors argued it was unfair, and possibly unconstitutional, to delay tax credits on investments that had already been made.


State lawmakers wanted to temporarily withhold the tax credits to keep the money and help close a $1.2 billion budget deficit through June 2011. But the Council on Revenues upgraded the state’s revenue forecast in May, reducing the immediate pressure to restrict cash flow.

Aiona, at a news conference at the state Capitol, said the bill would have damaged Hawaii’s reputation as a place to do business, undermined job creation and economic growth, and harmed the state’s bond rating.

"In short, this legislation is ill conceived because it negatively impacts Hawaii’s economy and makes it more difficult to sustain our current efforts to recover," Aiona said.

Aiona is acting governor while Gov. Linda Lingle is on a two-week trade and tourism promotion trip to China and Japan.

State House and Senate leaders have said it is doubtful they will return for a veto override session in July. Even if lawmakers do return, it is unlikely they have the two-thirds’ votes in both chambers necessary to override Aiona’s veto. The bill suspending the tax credits passed the Senate in late April by a narrow 14-11 vote.

The high-technology tax credits were intended as an incentive for investors to provide seed money for local technology and entertainment projects. The generous credits led to new investment in the islands over the past decade, but many have questioned the long-term impact on job creation in the technology sector.

Many lawmakers preferred to delay the tax credits, taken mostly by wealthy investors, insurance companies and banks, rather than make more significant spending cuts to state education and social-service programs. The bill would have allowed the state to keep an estimated $93 million next fiscal year, $47.5 million in fiscal year 2012 and $27.5 million in fiscal year 2013.

Lawmakers also passed a separate bill that ended the Act 221 program early – in May instead of December – which would allow the state to keep an additional $13 million. The bill would also extend a tax credit on research activities for one year. Aiona said he has recommended that Lingle veto the bill, but he said the governor has not made a decision.

Lingle had previously wanted to scale back the Act 221 program to help with the deficit. Last year the governor opted not to veto a bill that restricted the tax credits. Aiona disagreed with Lingle’s decision, one of the few times he has publicly taken a position contrary to the governor.

While the Act 221 program is ending this year, investors are still able to claim the tax credits. The program allows investors to use the credits to offset state tax liability for five years and to carry forward unused tax credits earned before May 2009, when the program was restricted.

William Plum, an attorney who opposed the bill, said Aiona’s veto means the state will keep its word to investors. He said the bill would have changed the rules after financial commitments had been made.

Plum said: "It would be somewhat like your lender coming to you for your mortgage for your house and saying, ‘By the way, we need a little more money this month, so let’s double your mortgage payments for the next three years, because we’re a little short on capital.’

"It’s absolutely no different than that."

State Sen. Carol Fukunaga (D, Makiki-Pawaa) said the bill raised constitutional issues. Margery Bronster, a former state attorney general, and other attorneys had told lawmakers that the bill could be a violation of the due-process clause of the Fifth Amendment to the U.S. Constitution because of its retroactive application.

"I’m sort of relieved that the state will not be taking an action which could subject us to tremendous legal challenges," Fukunaga said.

State Rep. Pono Chong (D, Maunawili-Olomana-Enchanted Lake), who had favored the bill, said he was fine with the veto as long as the Lingle administration has found other ways to close the deficit.


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