A long-expired tax credit program still doles out millions of dollars annually to investors who put money into Hawaii high-tech startups.
Even though the Legislature eliminated the High Technology Business Investment Tax Credit in 2009, taxpayers shelled out $16.3 million for the credit in 2016, the latest year for which data were available from the Hawaii Department of Taxation. Among credits for economic development, only Hawaii’s renewable energy and motion picture tax credits cost the state more.
The state still pays out tax credits for the expired program because the law setting up the high-tech credits allowed investors to invest money and then hold on to the credits indefinitely before redeeming them.
“It’s the gift that keeps on giving,” Greg Kim, a Honolulu attorney who works with startups, said of the technology tax credit. “It just feels weird to be paying for this program when it’s long gone.”
Kim, who has spent decades helping fledgling companies in Silicon Valley and Hawaii, said he knows of only one of the qualified high-tech businesses that’s still around from the early days, when the credits were being awarded and “Act 221” was a buzz phrase that embodied the vision that Hawaii could be a high-tech business center.
Meanwhile, the credit’s cost to the state dwarfs those to promote social welfare. A credit to help low-income apartment renters, for example, cost the state $2.7 million.
“If we had that money for social programs, we could really have an impact,” Kim said.
The tax department does not provide information on persons or companies that have received the investment credits, so it is impossible for the public to verify who has benefitted — or whether any jobs have been created.
The ongoing costs associated with the high-tech program serves as a cautionary tale for lawmakers heading into the 2019 legislative session, which starts Jan. 16. Tax credits totaled about $289 million in 2016.
Rep. Sylvia Luke, the Legislature’s chief fiscal watchdog as chair of the House Finance Committee, notes that tax credits might seem innocuous, but they’re still expenditures.
In most cases, to put it simply, Hawaii collects tax revenue and puts it into a bucket, then doles out the money to cover the cost of running the state government, which totaled about $14.4 billion last year. Federal funds or money designated for special funds automatically goes to certain pre-designated expenses and is mostly outside the control of lawmakers.
About a quarter of a billion dollars in tax credits in essence never make it into the bucket, falling outside of the normal budget process. Once the Legislature sets up a tax credit, the cost to the state usually is out of the hands of the lawmakers unless they come back and modify the law.
That’s a reason “we need to have caps on them,” Luke said.
Caps aren’t the only tool lawmakers are using. In 2016, Luke and her Senate colleagues passed a law requiring rolling reviews of all Hawaii’s tax credits, exemptions and exclusions. The bill noted that tax credits require “ordinary taxpayers who do not benefit from the exemptions, exclusions, and credits to compensate for the reduced revenues.”
“Alternatively,” the bill noted, “funding for important state programs must be curtailed.”
The first of those reviews isn’t due to the Legislature until later this year. In the meantime, the tax department’s annual report on credits gives the most comprehensive picture of where the money is going.
The report shows that in 2016, Hawaii paid out $289.1 million in tax credits through 25 different programs. The lion’s share, $143.8 million, went to subsidize targeted industries.
Another $78.1 million went to prevent taxpayers from paying essentially the same tax multiple times. For instance, Hawaii residents can often claim a credit for income taxes paid to another state or foreign country if the income was earned in the other state or country.
Other credits are designed to promote social welfare and economic equality, like credits for landlords who provide housing to low-income people. Low-income renters can claim a small credit as well. Credits to promote social welfare totaled $67.2 million, or 23 percent of the total.
The largest single incentive was $85.8 million in credits for solar energy systems. Luke noted that alternative energy credit is driven by the state’s policy to produce 100 percent of electricity sold in the state with renewable resources by 2045.
But the credit has likely crested, said Robert Harris, a spokesman for the Alliance for Solar Choice, a solar industry association. That’s because the Hawaiian Electric Co. and its affiliates have rolled back the prices they pay consumers to buy excess solar power produced by rooftop systems. The result has been plummeting demand for residential solar systems, which will mean a drop in tax credits.
“Clearly the number of sales that has occurred in 2017 and 2018 is drastically lower than in 2016,” Harris said.
Luke said lawmakers may consider credits for investment in battery storage systems this session, but she said it will be important to see that the incentives will benefit average consumers.
The next biggest business incentive went to movie and television producers. Production companies received $31.9 million in refundable tax credits in 2016, which are essentially cash rebates covering 20 to 25 percent of production expenditures. The Legislature has imposed a $35 million annual limit that takes effect this year, but the aggregate amount awarded in a year can exceed the limit if the production company waits until the next year to claim the credits exceeding the limit.
The now-defunct high-tech credit ranked third among business development credits. The credit, established by Act 221 of the 2001 legislative session, was redeemeed on 411 tax returns for 2016, and the amounts claimed totaled $16.3 million, down from $24.2 million for 2015 and $37.7 million for 2014. That’s a total of $78.2 million for the last three available years.
Deborah Kwan, a spokeswoman for the tax department, said tax credit information, including companies who had received the credits, is confidential business information that the department cannot release.
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