Hawaii Expected to Limit Tax Credits for Technology Investments

Hawaii's tax credits for research and investment in high-tech companies have cost the state more than $747 million since it was instituted in 1999 through the end of 2007, according to the study. The Department found that the state's investment has yielded only one full-time job at the associated firms per $535,000 in credits. In response to the report and the state's tightening fiscal situation, Governor Linda Lingle announced that more restriction would be put on these credits under the upcoming biennial budget.

The High-Technology Business Investment Tax Credit originally allowed investors to receive a tax credit equal to ten percent of their investment in a high-tech firm, up to $500,000 per year. The credit was expanded in 2001 to allow investors to recoup 100 percent of their investment back in tax credits, spread out over five years. The maximum single-year credit was raised to $700,000. The 2001 changes also removed a requirement that the company be involved in a minimum amount of research to qualify investors for the credit. In 2004, eligibility for the credit was limited by a requirement that investee firms be certified a Qualified High Technology Businesses (QHTBs) by the Department of Taxation.

Many, however, remained concerned about the lack of information about investors and QHTBs. In 2007, the Hawaiian Legislature introduced a requirement that QHTBs submit information about the investors, employment, job creation, wages, revenues, expenses and other data to the state. This information could be used by the state to evaluate the effectiveness of the program. The first such report was submitted to the legislature in November 2007. It revealed that a large portion of these credits were given to performing arts firms instead of research-based companies. Many of the jobs that were produced by these performing arts companies were part-time, temporary and lower-paying than their counterparts in energy and information technology.

The current report poses questions about viability of the current tax credits, but also includes encouraging data on the quality of jobs being created at QHTBs. The average salary of these new jobs is over $76,000, well above the overall state average. Also, participating QHTBs were responsible for 63 percent of high-tech job creation in the state between 2002 and 2007.

Governor Lingle's budget proposal for the 2010 and 2011 fiscal years calls for tightening the Act 221 investment tax credits to conform to the federal tax code. The credits are scheduled to sunset in 2010. High-tech industry representatives had been preparing to push for an extension of the credits during the upcoming legislative session, but may now have to work to preserve them through 2010, according to another Honolulu Advertiser report (available for purchase on the Honolulu Advertiser site).