Are Hawaii's Tech Tax Credit Worth the Cost?

Comment

Comment by GB Hajim on April 8, 2009 at 10:19am

We've been working on the movie since 2005. We finish this year. The $350k has helped us with start up costs (which will lead us to hire 5 more employees by the end of the year and we have had a total of 25 interns). And remember $25,000 has gone to the attorneys and CPAs on O'ahu! So if you break it down by years the tax is helping us with about $5000 per year per employee.

Comment by Bruce M. Bird on April 8, 2009 at 9:34am

Hi, John.

You wrote: "My personal experience running operations for a 221 company is that 221 caused us to take strategic risks beyond the capabilities of technology and talent available. By making funding easier to obtain, we spent more money than I believe we should have and went after goals that I think were too difficult to obtain. I felt it encouraged us to dream big and get us in over our heads."

Just a thought: It would seem to me that the management of a given company might "dream too big" whether or not Act 221 is available. So, I'm not entirely sure what you meant by your statement. Did you mean that Act 221 is attracting riskier companies to Hawaii? Or riskier management? Or both?

Comment by Bruce M. Bird on April 8, 2009 at 3:30am

Hi, G B. You make an excellent point.

From time to time, the Department of Taxation releases information breaking down the amount of Act 221 credit claimed on an island-by-island basis. I don't have the report in front of me, but I think it's something in the neighborhood of 90+ percent of the Act 221 credit that flows to the island of Oahu.

So, if someone lives on an island other than Oahu --like the Big Island-- I can see how there might not be enough Act 221 work to go around in order for most CPAs or attorneys there to want to handle it.

If it were me, I certainly wouldn't want to have to board a plane to fly to Honolulu every time I wanted to meet with my CPA and/or attorney.

By the way, by my calculation, $350,000 (in credits) / 5 (full-time workers) is $70,000 in credit/ full-time employee. And $350,000 (in credits used) / 13 workers (full-time, part-time, and subcontractors) is about $27,000 credit/ worker. Either way you slice it, that is quite a lot of "bang for the buck".

P.S. -- Just wondering: How far along are you on your movie?

Comment by GB Hajim on April 7, 2009 at 6:22pm

I totally agree there should be a cap per company. Maybe a $5 million cap and that the principals may only use the tax incentives to start one company. I do want to point out that we have created 5 full time, 5 part time, employ 3 subcontractors, run an internship program with the local high school and have only used $350,000 in tax credits. Though we have raised over $1.5 million in other monies.

The other thing is that we still have problems convincing people on the Big Island that this credit exists. There is not a single CPA nor lawyer in East Hawaii that will handle the tax work or fiscal structure for a QHTB. On the other hand, East Hawaii needs these kinds of incentives more than maybe any other place in the state.

Two nights ago we had a party with some of my employees. One of their fathers came up to me and said that never in his wildest dreams that he thought his daughter was going to be able to stay on our island and have work in her field.

Malama pono

Comment by Bruce M. Bird on April 7, 2009 at 5:41pm

Hi, John, Laurence, Bill & G B.

Here's a link to an article on Act 221 by the director of the Hawaii Department of Taxation at: http://www.honoluluadvertiser.com/apps/pbcs.dll/article?AID=2009904020313 .

Comment by Bill Spencer on April 4, 2009 at 7:22pm

Excellent statement of the challenge we must overcome in Hawaii. Thank you Laurence.

Comment by Laurence A. Lee on April 4, 2009 at 6:01pm

I'd venture to say it's tough to raise capital here -vs- the Mainland because our State Government is so tragically flawed. We have people deciding on who qualify as QHTBs, along with the ultimate fate of Act 221, who don't have nearly as good a comprehension as some people commenting on this Thread.

I also dare say that our State Legislators are far more incompetent and far more irresponsible than the Patent Office Clerks who rubber-stamp bogus Technology IP patents.

Seriously, I can just point to how Hawaii screwed the SuperFerry out of $$ Millions $$ to build those dock improvements, and I can empathize with Mainland Investors who'd rather just walk away. With Hawaii being as flawed as it is, I'd both be saddened and elated if Google, Intel, or Microsoft held a huge press release saying that they considered setting up shop in Hawaii to take advantage of Act 221 funding, but decided against starting in Hawaii for fear of Hawaii's politics.

Comment by GB Hajim on April 4, 2009 at 5:48pm

I concur. It is very difficult to raise capital here in Hawaii and to raise the matching capital from the mainland? Near impossible. Remember we have Academy, Grammy, Emmy Award winning people on our project with collectively over $10 billion in gross receipts from the films that they played key roles in and platinum albums from our musicians and yet we barely scrap by in raising money. We are only trying to raise $3 million total. $1.2 million from Hawaii and $1.8 million from the mainland and abroad. To date we have raised $1.9 million. Only $355,000 from Hawaii tax credits!

Comment by Bill Spencer on April 4, 2009 at 5:36pm

John, you make it sound like Act 221 makes it so easy to obtain investment capital that management teams will spend like drunken sailors. If this was your experience, I would blame it on inexperienced management and/or lack of investor/board oversight, not easy money. I don't know anything about your company so please do not take this personally. As I mentioned, Hawaii Angels, of which I'm a board member, has seen 2000 business plans since February 2002 and invested in less than 2% of them. I doubt the entrepreneurs who received those investments would claim that it was easy money. In my experience, Act 221 has served to mitigate some of the risk involved for investors who put money into early stage deals, but it doesn't really make it easier for entrepreneurs to raise money or investors to write checks. Capital is scarce in Hawaii and always has been. In my experience investor dollars don't come easy. The only types of Act 221 deals that might be exceptions to that are the big movie deals and some project finance deals that probably shouldn't have even been allowed to be funded under 221, but were, because the Governor intervened and had the tax department make exceptions. No that is a moral hazard if you ask me!

Comment by John on April 4, 2009 at 2:53pm

I think these hypothetical 221 abuse scenarios actually detract from the real risk of 221. Each time Bill sees such a comment, it probably convinces him more strongly that critics are out of touch.

My personal experience running operations for a 221 company is that 221 caused us to take strategic risks beyond the capabilities of technology and talent available. By making funding easier to obtain, we spent more money than I believe we should have and went after goals that I think were too difficult to obtain. I felt it encouraged us to dream big and get us in over our heads.

I see a similar pattern in a number of 221 funded companies.

This is just my opinion and perhaps I am simply too conservative. I think the main risk of 221 is driving companies to 'bite off more than they can chew', not tax fraud.

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