Hawaii Tightens Restrictions on High-Tech Investment Tax Credit

Hawaii Governor Linda Lingle recently allowed a significant revision to the state's High-Technology Investment Tax Credits program become law without her signature. The program, which has provided a 100 percent credit on high-tech investments since 2001, now will cap its credits at 80 percent. Investors also will no longer be able to transfer their credits to other investors. The revisions will apply through December 2010, when the tax credit program is scheduled to expire.

Hawaii's investment tax credit has gone through a number of changes since its introduction in 1999. The 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 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 Qualified High Technology Businesses (QHTBs) by the Department of Taxation.

In 2007, the state legislature introduced additional reporting requirements to measure the effectiveness of the program, including data about investors and QHTBs. The results were published in a series of reports that fueled complaints that credits were not serving their original purpose. The list of QHTBs included media companies, which often created jobs that disappeared once production had ended. Opponents also claimed that the credits were providing generous tax shelters for wealthy investors, who could invest without assuming any risk. Providing this shelter came at a considerable cost to the state, which has paid $657.5 million to investors through the program since 1999.

Under the previous arrangement, it also was possible for out-of-state investors without a Hawaii state tax liability to transfer their credits to an in-state investor. This enabled out-of-state investors to trade their credits for additional equity in Hawaiian companies by making a deal with in-state investors.

By instituting new changes, the state estimates that it will save $150 million in losses through the tax credits.

Opponents to the changes, including the lieutenant governor, argued that many investors identified the credits as one of the key reasons they chose to invest in the state, the bill sent the wrong message to potential investors and could undermine the state's efforts to diversify.

More information, including the text of the new bill, is available at: http://www.capitol.hawaii.gov/session2009/lists/measure_indiv.aspx?billtype=SB&billnumber=199