Tax credit small but ‘better than a poke in the eye,’ lawmaker says

Burned by high-technology tax incentives that many tax policy experts thought were too generous and ripe for abuse, state lawmakers have chosen to resurrect a pared-down research and development credit to reward scientific experimentation.

The 20 percent income tax credit would apply to research spending from 2013 through 2019 and would cost the state about $3.2 million a year. Companies would have to claim a similar federal tax credit to qualify and would have to increase research spending over time to enjoy the full amount.

Companies that take advantage of the tax credit would also have to file detailed annual surveys with the state Department of Business, Economic Development and Tourism so the state can track the effects on job creation, new patents or intellectual property and commercial applications.

High-tech tax incentives, which included a research and development credit, cost the state $1 billion through the past decade and were criticized by the state auditor and tax policy experts as deficient. The auditor concluded in a report last year that the state was unable to measure or ensure the effectiveness of the credits, which ran from 1999 through 2010.

Patrick Sullivan, founder and chairman of Oceanit, a science and engineering firm, said the revived research and development tax credit would be so limited that it is largely a symbolic gesture. But he and others believe it is worth starting with something smaller in scope, given how the last high-tech tax incentives were perceived.

"What we’re really trying to do is restart a conversation in the state on why the tech industry and R&D is important for the state long term," Sullivan said.

Lawmakers still believe tax credits, even smaller ones, can be catalysts for innovation and economic diversity that might help the state’s economy grow and reverse the "brain drain" of science, technology, engineering and mathematics talent to the mainland. Gov. Neil Abercrombie is likely to allow the credit in Senate Bill 1349 to become law.

Sen. Donovan Dela Cruz (D, Wheeler-Wahiawa-Schofield), the bill’s sponsor, said he is not necessarily a huge fan of tax credits and would prefer a more comprehensive plan for economic diversification. But he believes the incentive is consistent with the "live, work, play" theme the state wants to nurture.

"Whatever we can do to try to make Hawaii an attractive place to do business for research and development," he said.

Rep. Isaac Choy <$o($)>(D, Manoa-Punahou-Moiliili), an accountant and a former chairman of the Tax Review Commission who has become a resource for other lawmakers on tax policy, said the state’s previous research and development tax credit was too generous.

Choy said the intent behind the federal tax credit is to provide an incentive for companies to increase research spending, not to award tax breaks for base amounts of research spending from previous years, as the old state tax credit did. He acknowledged that aligning the state’s tax credit to the federal tax code will significantly limit the potential tax break.

"It’s better than a poke in the eye," he said.

Lowell Kalapa, president of the Tax Foundation of Hawaii, questions whether Hawaii has sufficient talent in the academic and high-tech sectors to take advantage of such tax incentives. "Before you put the cart and fill it up with gold, make sure you’ve got a horse to pull it," he said.

Kalapa has told lawmakers that using tax credits as incentives for targeted economic growth is often poor policy, mostly because the effectiveness of such incentives has been difficult to document. The two tax credits that survived last session were the expansion of film production tax credits — which he attributes to Hollywood allure — and the research and development tax credit, "which basically nobody really understands."

But many investors, entrepreneurs and executives in the state’s burgeoning high-tech industry have defended tax credits during the past decade as important seeds of economic diversification.

Without new incentives, many argue, a high-tech industry may never fully bloom.

"It allows us the ability to bring in talent and a strong labor pool back to the state. It makes us more competitive," said Martin Kao, president of Nava­tek Ltd., a research and development company for military and commercial operations.

Kao had wanted lawmakers to apply the research and development credit annually to all qualified research expenses — and not just the increases in spending over the base amounts from previous years — warning that many companies may not be able to qualify.

But Kao appreciates that a credit might be revived. "It troubled me personally where we didn’t have a state that kind of acknowledged the notion that what we’re trying to do is bring jobs back to Hawaii," he said.

James Karins, president of Puko‘a Scientific, which develops image-processing software, said other states are making stronger pushes to attract research and development. He said a limited tax credit in Hawaii could be toughest on smaller companies that can take years to develop resources to finance research.

"Certainly anything is better than nothing," he said.