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Data cast some doubt on Act 221’s benefits

  • CRAIG T. KOJIMA / CKOJIMA@STARADVERTISER.COM
    Navatek is one Hawaii firm that received high-technology tax credits. Greg Wong, top, mechanical engineer/test boat captain for Navatek; Gregor Welpton, materials engineer; and Alex Pollara, intern, work on a SAM RIB (Seakindly, Anti-Slamming Monohull Rigid Inflatable Boat). The yellow SAM RIB boat is the commercial version of the military SAM 9M USV craft the company sold to Singapore. The company's goal with all Navatek-patented hull designs is to be able to sell both a military and a commercial version.
  • CRAIG T. KOJIMA / CKOJIMA@STARADVERTISER.COM
    John Zuanich is a general manager of small boats for Navatek. Honolulu's Navatek has started three technology companies benefiting from state technology tax credits. During the last five years, overall employment at Navatek firms has doubled to about 50 full-time employees.
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Eighty-two of 141 companies benefiting from state technology investment tax incentives had no full-time employees in 2008.

The other 59 businesses, including movie and TV producers, had 697 people on their payrolls, based on unemployment insurance records.

Those are the first figures released by the state showing the employment at companies benefiting from the program, which provides a 100 percent tax credit for investments in a qualifying technology businesses.

The state tax credit, known as Act 221, was adopted in 1999 to spur growth in Hawaii’s fledgling technology sector and diversify an economy largely dependent on tourism and government spending.

Companies benefiting from the generous tax credits have created high-paying jobs, averaging nearly $75,000 a year. They’ve also registered 64 patents, according to a report compiled by the state Department of Business, Economic Development and Tourism.

The two-page study shows the credits are boosting Hawaii’s high-tech presence. However, it also raises concern about whether the benefits are worth the program’s $100 million to $200 million annual cost.

From 2001 to 2008, the credits cost the state up to $1.2 billion in forgone income tax revenues. The actual costs won’t be known for years because the credits can be claimed over five years.

ACT 221

What is it?: Act 221 gives Hawaii residents a 100 percent state income tax credit for money they invest in high-technology companies.

 

By The Numbers

141: Number of companies benefiting from credits.
59: Number of companies with full-time employees in 2008.
697: Number of jobs at those companies.
$1.2B: Cost to state in forgone tax revenue.

Source: Department of Business, Economic Development and Tourism

The fact that 58 percent of the companies benefiting from the credits had no direct full-time employees is suspicious, said former state Department of Taxation tax research officer Tu Duc Pham.

"A lot of these (companies) might be fake," he said. "There should be a special task force and do an investigation."

Linda Smith, Gov. Linda Lingle’s senior policy adviser, deferred questions to the tax department about whether the DBEDT data indicates a need to audit technology companies or the state tax department. Tax department officials were unavailable for comment Friday.

Smith added that Lingle hasn’t been satisfied with Act 221.

"This administration has continued to flag concerns about Act 221 that tax credits are not the most effective way of incentivizing companies for job creation," Smith said. The administration has unsuccessfully pushed for the creation of a professionally managed fund that would invest in companies with the potential of creating significant numbers of high-wage jobs.

Proponents of the tax credits contend that the program’s main goal is to generate investments in local high-technology firms. More than $1.2 billion has been invested in qualifying companies via the credits. Technology jobs could come later as these businesses mature.

The employment figures reported by DBEDT exclude workers who may have been hired through staffing firms or by subcontractors. The job figures also exclude self-employed and part-time employees, who would not be reported for unemployment insurance purposes.

The incentives provide a 100 percent tax credit to Hawaii residents investing in local technology companies and another 20 percent credit to companies to offset research expenditures.

The credits have been criticized as being overly generous, failing to produce offsetting economic benefits, being shrouded in secrecy and, in some cases, creating only temporary movie industry jobs.

Since 2001, more than 370 companies have benefited from the program. So far the names of only 141 companies have been made public under a law passed in 2007. Those are the companies that received investments after June 30, 2007.

Among those companies is Manoa-based Pukoa Scientific, which was founded in 2004 and develops software for military sensors. Pukoa CEO James Karins said research tax credits have helped the company grow to 13 full-time employees and take in revenue of $2.8 million last year.

Karins said the lack of direct employment at many of the tax credit-backed companies could be due to outsourcing and the startup nature of many technology businesses.

However, it’s also likely that the generous nature of the investment tax credits and the program’s broad rules resulted in businesses taking advantage of the credit primarily for tax purposes without creating high-tech jobs, Karins said.

"I wouldn’t be surprised if some of these are just (tax) shelters," he said.

Just how many jobs the state is getting for its money has been under debate for years. According to TechAmerica, a Washington, D.C.-based trade group that advocates for the high-tech industry, Hawaii’s technology sector remains one of the smallest in the country, ranking 46th among states with 15,019 jobs last year. Hawaii’s total labor force in 2009 was about 590,000.

Many of the 141 companies on the list—such as medical device maker Hoana Medical, tissue engineering company Tissue Genesis Inc., ocean engineering company Navatek and digital media developer Blue Lava Technologies—fit the mold of innovative companies that can spur the growth of a high-tech sector.

Honolulu’s Navatek has started three technology companies benefiting from state technology tax credits. During the last five years, overall employment at Navatek firms has doubled to about 50 full-time employees making an average of more than $75,000 a year, said Martin Kao, chief financial officer for Navatek. Meanwhile, the company’s patent portfolio has grown from two to 21, he said.

Tax credits have helped, Kao said.

In addition to technology companies, Act 221 helped a host of TV and film production companies, including the producer of ABC’s "Lost," as well as music recording firms.

Other companies benefiting from the program include a former guava farm, a timber grower and an Oahu exporter of deep-sea water. The list also includes a company that sells swimming lessons on DVD, the producer of a TV talk show and a company formed by Hilo mixed martial arts fighter BJ Penn.

First Hawaiian Bank, insurer AIG Hawaii, DTRIC Insurance and Royal State Insurance are also among the 141 Act 221 companies.

In some cases, non-high-tech companies qualify for the program by creating what’s referred to as a "drop-down" subsidiary, in which a portion of their information technology operations are placed into subsidiaries that qualify for technology tax credits.

Some question whether such a strategy stretches the intent of the program by shifting employees into a subsidiary that provides similar services or sells services primarily to the parent company. That could allow a parent company to get investment tax credits on what otherwise would be operating expenses.

That tax-saving strategy creates tax credits for investors without generating new jobs, said state Rep. Isaac Choy (D, Manoa).

"There are companies that do that," said Choy, a partner at Manoa Consulting Group CPAs. "The broadness of the law and the lack of specific regulations mean the law can be legally justified in many ways. … Whether or not there are jobs created, that was never a requirement."

Choy added: "This should be a lesson for the Legislature in the future. We paid the tuition, so let’s learn the lesson. The lesson is not that tax credits are bad, but that we have to control them and we have to have adequate annual reporting to gauge their effectiveness."

 

Companies benefiting from technology investment tax credits

ABR LLC
AGIS Network Inc.
AIG HAWAII PACIFIC TECHNOLOGIES INC.
AIG HAWAII TECHNOLOGIES INC.
Angelin LLC
Animate Farm LLC
Applied Marine Solutions
Archinoetics LLC
ATCO Software LLC
ATLANTIS CYBERSPACE INC
Avatar Reality Inc
BAE Systems Special
Solutions LLC
Big Island Biodiesel LLC
BIOENERGY HAWAII LLC
BiVision Systems Inc.
BJ Penn Enterprise LLC
Black Ivory Biotech Corporation
Blackbird LLC.
Blue Lava Technologies Inc.
Broadband iTV Inc.
Cardax Pharmaceuticals Inc.
Cellular Bioengineering Inc.
Charles Michael Brotman Music LLC
ChipIn Inc.
Clear Fuels Technology Inc.
Clear View Patient Safety Products LLC
CONFIDANT HAWAII LLC
Convergence CT Inc.
DiscoveryBox Inc.
DSH International Inc.
Edutainment Resources Inc.
Epicrays LLC
Family Tree Productions LLC
Getting That Girl LLC
GRAMCAST LLC
Grass Skirt Productions LLC
Green Energy Hydro LLC
Green Energy Team LLC
H NU PHOTONICS LLC
HANU SURGICAL DEVICES LLC
HAWAII BIOENERGY LLC
Hawaii Biotech Inc.
Hawaii Film Partners LLC
Hawaii Oceanic Technology Inc.
Hawaiian Mahogany Inc.
HAWAIII HIGH TECHNOLOGY LLC
Hi-Tech Insurance Systems Development
HOANA MEDICAL INC.
Ho’okele Health Technologies LLC
HOCOR Cardiovascular Technologies LLC
Hoike Services Inc.
Hoku Scientific Inc.
Honolulu Seawater Air Conditioning LLC
Hookipa Media Productions LLC
I Am Hawaii LLC
IFILM CONNECTIONS: ASIA & PACIFIC INC.
Innovase LLC
INSYNERGY RENEWABLES LLC
IRIS WIRELESS DEVELOPMENT
Island Film Studios LLC
Island Productions Project II LLC
Island Productions Project III LLC
Kaheawa Wind Power LLC
Kai Sensors Inc.
Keahole Solar Power LLC
KIC Technology 1 Inc.
KIC Technology 2 Inc.
Kinetic Films
Kolu Pohaku Technologies LLC
KONA BLUE WATER FARMS LLC
Kuehnle Agrosystems Inc.
Lanai Sustainability Research LLC
LLC RSVPstyle
Makaha Studios LLC
MAKILA HYDRO LLC
MARLIN POWER COMPANY LLC
MAUI AG TECH LLC
MAUI FRESH FISH LLC
Maui X-Stream Inc.
Mid Pacific Communications Inc.
MIX808 LLC
MMP PROJECT 1 LLC
Mobile Broadband Inc.
NANOPOINT INC uBoost Inc.
Natural Power Concepts Inc.
Natural Remedy Labs LLC
Navatek Alternative Energy Technologies
Navatek CFD Technologies LLC
Navatek Lifting Bodies Technologies LLC
NightTime Productions LLC
Ninjai Gang LLC
Oahu Productions LLC
Ocean Network LLC
OCEES International Inc.
Pacific Agriculture Research Co. LLC
Pacific Biotech LLC
Pacific Films LLC
Pacific Network LLC
Pacific Wave Marketing LLC
Panthera Biopharma LLC
Peletex Inc.
PEOPLE BRIDGE INC
Personal Health Labs LLC
Phase 2 Software LLC
Pineapple Pictures LLC
Pipeline Communications and Technology Inc.
Pipeline Micro Inc.
PIPELINEFX LLC
ProData Systems LLC
Pukoa Scientific
Safe Water Systems Inc.
Science and Technology International Inc
SDC HAWAII LLC
SeeTheBook LLC
Servpac Inc
Short List LLC
Sopogy Inc.
STI Medical Systems LLC
STI Research LLC
Sunrise Capital Inc
Sunrise Group LLC
Sustainable Design LLC
SUSTAINABLE ENERGY SYSTEMS LLC
Talisman LBS LLC
TeamPraxis LLC
Tempest Production LLC
TeraSys Technologies LLC
Tissue Genesis Institute LLC
Tissue Genesis Inc.
TP Research Hawaii LLC
Trex Hawaii LLC
Ua Records LLC
uBoots Inc
Ulua Media LLC
Vhibe Videos LLC
Waterproof Kids LLC
Wave Peak Energy LLC.
William C. Koeppen
Xenon Entertainment LLC
Zero Emissions Projects LLC

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