Tax Review Commission Iffy on Act 221

Last Friday, the Tax Review Commission met to finalize its "Draft Report of the 2005 - 2007 Tax Review Commission." In this report, the Commission addressed the sticky issue of the cost of Act 221, Hawaii's controversial high-tech investment tax credit. Here's what it concluded (starting on page 19 of the .pdf version of the report):

This Commission shares the view of the 2001-2003 Tax Review Commission,
"A tax incentive program is a potential 'black hole,' because it is a future benefit of unknown proportions, which is determined bythe favored taxpayer's interpretation of what the tax credit should be, and is claimed on a tax return which is confidential."

We believe Act 221/215 raises similar concerns. We recommend that the Legislature avoid using tax credits as an economic development tool. As for the high technology business investment tax credit, the cost of the credit has proven hard to determine in a timely manner. In order to get more control over the program and to curb potential abuses, the Legislature should change it from a tax credit to a program of grants administered by a State Agency. If the credit is kept, this Commission recommends the following changes be adopted, at a minimum:
• Increase transparency and timely disclosure so that the credit can be evaluated effectively. Towards this end, we believe the data reporting should be mandatory and expanded to include sales; employment by compensation ranges and status, including full-time, part-time, and seasonal; and number of trademarks, patents, and copyrights obtained during the year.
• The data should be collected by NAICS codes and distributed to the public periodically, but not less frequently than annually.
• To gather the data, a tax confidentiality waiver should be required so that pertinent data can be released to the public.
• The Commission was unable to determine to its satisfaction whether the high technology business investment tax credit has achieved its goals, but we are concerned that the credit imposes a substantial drain on the resources of the State. Consequently, we believe an independent evaluation should be performed prior to any extension of the credit. These considerations may well apply to other tax credits. If the requirement for qualified high technology companies to report more data is implemented, the Department of Taxation should review the question of whether there is a continued need for certification.

Interestingly (and a bit alarmingly), the Commission points to Sean Hao's 10/7/06 Hnl Advertiser article "Isles' Tech Jobs Drop Despite Tax Credit" when footnoting a point credited to an outside study about Act 221 contracted by the Commission called "Measuring the Costs and Benefits of Hawaii's Qualified High Technology Business Investment Tax Credit." The point was that Act 221 could potentially cost $600 million over its lifetime. What's puzzling is, why did the Commission point to the Hao article (a secondary source) instead of its own Act 221 study (a primary source) which outside consultants were paid to conduct (and presumably, which would've provided that data point for Hao's article)? A quick perusal of the study (which is included in the same .pdf document as Appendix B, starting on page 63) didn't show any $600 million figure quoted, so where the heck did it come from? Referencing back to Hao's article, it seems that one of the study's authors, Marcia Sakai, verbally stated that estimate. But I must ask: why isn't it in the written study? Perhaps I may have missed it and one of you eagle-eyed blog readers can point it out to me.

So, basically, the Commission's conclusion on Act 221 seems to be (and I'm paraphrasing): "Well, Act 221 could potentially be a black hole, so if you all decide to extend it, get some hard data and transparency first to see if the thing actually works. But as far as we can tell now, we think you should scrap all tax incentives for economic development and maybe replace them with grant programs."

>> Draft Report of the 2005 - 2007 Tax Review Commission [11/21/06]
>> Tech credit called 'substantial drain' [Hnl Advertiser, 11/3/06]

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>> Tax Incentives Suck...Who Said That?