Hawaii Commission Recommends Greater Accountability for High-Tech Investment Tax Credit Program

A recent report from Hawaii’s Tax Review Commission recommends the state eliminate or drastically overhaul its five-year old tax credit for high-tech investors. According to the report, the current credit provides no clear advantage to the state and appears open to taxpayer abuse. The commission was particularly troubled by the lack of data provided by taxpayers who were approved for the credit and by the lack of transparency concerning the credit within the state’s Department of Taxation.

 

A review undertaken on behalf of the commission was unable to determine the effectiveness of the credit, due to insufficient data on its cost to the state and its impact on state high-tech industries. This lack of transparency led the commission to suggest the Hawaii credit may be a ‘black hole’ for tax revenues, and propose legislative changes that would restructure the credit as a program of grants administered by a state agency.

 

The Tax Review Commission concluded that the state’s high-tech industries would be better served by a program of grants administered by a state agency, which could better oversee the state’s technology efforts. Barring such a change, the report recommends the tax credit:

• Collect additional information from investors about their investee firms, such as sales, employees and intellectual property;
• Distribute tax credit data sorted by NAICS code to the public for periodic review
• Require investors to sign a tax confidentiality waiver in order to qualify; and,
• Use an independent evaluation to determine the effectiveness of the credit before extending it beyond 2010.

The commission also recommended the state minimize its use of any tax exemptions or credits for any purpose and include sunset dates for the review of any such tax break to ensure their accountability and effectiveness. Tax credits and exemptions shrink the tax base and can result in higher taxes for private citizens and other businesses. According to the Tax Foundation, Hawaii was the fifth-highest taxed state in 2005 and 2006. The commission warns that although these tax breaks are intended to attract new firms, acquiring a reputation for excessive taxation discourages businesses and hampers economic development.

 

Read the Hawaii Tax Review Commission report at: http://www.hawaii.gov/tax/a9_2trc_doc.htm