State may be out $1.7B in taxes

Special state tax credits lawmakers approved almost 15 years ago to spur growth in Hawaii’s technology sector could eventually cost the state up to $1.7 billion in lost tax collections, or more than twice the amount the state previously estimated, according to the Hawaii state auditor.

The auditor’s office also contends that even as businesses continue to claim the tax breaks, state lawmakers have “not been provided a true picture of the costs and benefits” of the high-tech tax credit and other credits.

The auditor’s office has argued since 2012 that the high-tech tax credit law was passed without any goals or performance measures, therefore the state has no accurate way to measure whether the credit helped to grow high-tech industries in Hawaii.

The most generous high-tech tax credit was in a state law known as Act 221, which allowed a 100 percent state tax credit on investments of up to $2 million per company, with no time limit on when a company could use the credit to reduce its state tax liability.

That credit was eliminated in 2010, and the state Department of Taxation estimated that year that the high-tech tax credits had cost the state $857.6 million.

However, in a recent report updating its analysis of the high-tech credits, the auditor’s office noted the state Department of Taxation has identified $1.7 billion in investments in Hawaii by companies that qualify for the credit. The auditor’s report warned that “the state remains obligated to honor these tax credit claims.”

The report cited statistics from the tax department showing that performing arts companies invested $659.9 million in time to qualify for the credit, while non-fossil-fuel energy companies invested another $137 million. Software companies made $235 million in qualifying investments and biotechnology companies invested nearly $80 million, according to the report.

Tom Yamachika, president of the Tax Foundation of Hawaii, contends the high-tech tax credits in Act 221 were among the most expensive the state ever enacted, but it was difficult for lawmakers to know from the outset how much the credits would cost.

“You never know, because a lot of these tax incentives are open-ended, (they) have no idea when they enact them how much the price tag is ultimately going to be,” Yamachika said. “They have estimates, and that’s all they have, so they guess.”

Lawmakers and the tax department later caught on to how much the credits cost the state, and then stepped in to end them, he said.

As for the question of whether the credits were good tax policy, he said lawmakers were trying to kick-start an industry with a bold policy, “and there’s nothing wrong with that. Sometimes you have to do bold things to get people to act.”

Yamachika believes it is “fairly obvious” the credits did help to grow the tech industry, and “we got companies in here and industries in here that weren’t looking at us before.”

He added, “How long they’re going to stay, I don’t know, but at least they’re here.”

Patrick Sullivan, chief executive officer of Oceanit Laboratories Inc., said he believes the state needs to explore ways to diversify the economy, and growing the technology sector is a good way to do that. However, he said the state ended up awarding the credits to companies that weren’t really high-tech firms.

“The net of it, though, was it was a good thing to do, and I think we learned a lot as a community, and I think we need to come up with another variation to carve out some of the abuses, but to continue to support creating a future for our young people with more jobs and a more diverse economy,” he said.

Sullivan said Oceanit never used the Act 221 credits, but some of the spinoff companies that Oceanit helped launch did take advantage of the credits. Those are separate companies, although Oceanit may be a stockholder, he said.

Jay M. Fidell, founder and president of the nonprofit ThinkTech Hawaii Inc., scoffed at the estimate that the state may have to honor $1.7 billion in tax credits. ThinkTech was created to raise public awareness about technology in Hawaii.

“I can’t imagine how they got that number. It’s ridiculous, actually,” Fidell said. Fidell described the renewed criticism of a tax credit that expired in 2010 as “a continuation of the political attack that was going on of Act 221 under the (former Gov. Linda) Lingle administration and after the administration, which killed 221 before its time.“

“The termination of any tech tax credit in the state has had a huge discouraging effect, a dampening effect on tech investment and tech development at a time when we need it more than ever,” Fidell said.