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Are Hawaii's Tech Tax Credit Worth the Cost?

Today, the Honolulu Advertiser ran an article on 221/215. The article is primarily a strong attack on the prudence and viability of the tax credits. The article cites a new 25 page report by the Department of Taxation that is well worth reading.

The numbers look bad and the public reaction (both in quotes and comments from the community) are heavily negative.

The report states:

- $300 M in tax credits have already been claimed through 2006
- Another $350 M is projected to be claimed from 2007-2011.
- Only 2245 jobs have directly been created (David Watumull estimates over 400 total if independent contractors are included)
- Software companies only claim 16% of the total tax credits claimed
- Performing arts companies claim 33% of the total tax credit claimed
- Depending on what figures you use, the cost to the state per job created is somewhere between $140,000 to $530,000

Ongoing Discussions at TechHui

We have been discussing this issue for months - most recently on Dan's thread about finding and retaining talent, on the discussion to lobby for 221/215, and in the original discussion about caring for 221/215.

Are the Tax Credits Worth it?

I have not seen anyone in these discussions provided a careful analysis of the benefits of 221/215 relative to the costs. I see a lot of general excitement but not thoughtful examination of why the ROI is really there.

Giving companies large pots of money with little restrictions sounds like a bad idea. None of the reports I have seen shows otherwise.

While I am sure many companies using 221/215 are legitimate and have noble intentions, the program as a whole, seems to be an invitation to fraud and abuse.

I am looking forward to learning from a discussion on this topic.

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Comment by Bill Spencer on June 6, 2009 at 10:04am
Surely it would Bruce. But the Tax Dept. cannot even track and collect the $1 BILLION in unpaid taxes not collected every year. They suspect that these taxes are not paid by those in the "cash" economy ubt much comes from individuals who simply don't bother.
Comment by Bruce M. Bird on June 6, 2009 at 9:28am
Here's a part of the article:

"Following the failure of HotU, investors could have faced repaying up to 10 percent of the tax credits that they claimed. That's because Act 221 allowed the state to recover some of the tax credits if a business failed within five years of granting credits.

According to the state Department of Taxation, such repayments are made on a voluntary basis and the amounts of those reimbursements is not tracked. "

Wouldn't it make sense for the Department of Taxation to track the total amount of investment tax credit recapture? Or the total number of companies that no longer qualify QHTBs ? Or both ?
Comment by Bruce M. Bird on June 6, 2009 at 8:48am
Sean Hao wrote an article involving Act 221 several days ago in the Honolulu Advertiser. See also the reader comments that accompany the article.


http://www.honoluluadvertiser.com/apps/pbcs.dll/article?AID=2009906010330
Comment by Bruce M. Bird on June 3, 2009 at 4:01pm
Hi, Ken. You sure post some interesting stuff. Ottawa, ON, jumped from 66th to 37th; Vancouver, B.C., from 64th to 36th; and Salt Lake City, UT, from 44th to 34th. Those are some mighty big jumps.
Comment by Ken Berkun on June 2, 2009 at 7:56pm
New report from the Milken Institute ranking North America's High Tech Geographies. Hawaii doesn't even rate a mention (unless I missed something). Mexico does.

Short article about:
http://blog.seattlepi.com/techchron/archives/170120.asp

Download (must create an account, but it's free):
http://www.milkeninstitute.org/pdf/NamericaHiTechExecSmmry_Final.pdf

Ken
Comment by GB Hajim on May 15, 2009 at 11:49am
Laurence, please do it. Go to Pono Chong. I'd really love to hear how he responds. It would also give us a sense of what we need to address from the start.
Comment by Laurence A. Lee on May 15, 2009 at 10:29am
If "son of 221" includes more incentives and programs to help the Little Guy, I'd be happy to see if I can sway the Legislative opponents -- Pono Chong in particular. My gut feeling is that he's opposed to 221 and Technology Advancements because he believes too many Little Guys not associated with Technology would be left behind.

We need to be mindful of the local landscape: Wealthy, Educated, and Driven people are a minority. The vast majority are "trapped" in average jobs, knowingly destined to live within the same Tax Bracket until retirement. If the majority are resigned to knowing they'll never earn more than $70K/year, they've got no stake in preventing a "Millionaire Tax" from passing. Others with the means and drive can see the situation for what it is, and take off for the Mainland in true "Brain Drain" fashion.

Hawaii will never break the polarity between Big Fish and Little Guys -- at least, not until enough Little Guys are convinced that they do have viable opportunities to grow into Big Fish. That won't happen with Tourism and Military, but it's certainly possible with Technology; and the "son of 221" could be the keystone for making that happen.

Investment amounts under $100K may seem like peanuts to those seeking Venture Capital; but to a bright Computer Science Student with a good idea and the skills to back that up, even $5K would be enough to start a SaaS business. I'm very interested in finding ways to encourage people to "take their shot", or at least make it well-known that the opportunity exists and is easily accessible. Right now, Original 221 is only accessible to Big Fish, and the Little Guys are stuck taking out HELOCs and Personal Loans at great personal expense and risk.

I'd love nothing more than to walk into Pono Chong's office, give him the story of how Hewlett-Packard or Google got started, and present the case of how the "son of 221" can help the bright local college kid -- perhaps the son of someone not in Technology -- take his shot at creating the next big startup.

This is the portion of "son of 221" that would appeal to the masses; and if we can agree to brainstorm on ways to make that happen, I'm more than happy to discuss how we can refine the best of Original 221 (like the 2-for-1), to benefit the Big Fish while appeasing the Watchdogs.

A son of 221 effort is going to be time consuming, but I'm more than willing to put in the time to Draft, Refine, Lobby and Promote it if there's something for the Little Guy.
Comment by Bill Spencer on May 15, 2009 at 10:20am
"My approach" includes legislators. Jay Fidell does not work for the Advertiser, he is an unpaid contributor. The newspapers report the news and "influence" public opinion. They do not make laws.
Comment by David Jacobs on May 15, 2009 at 10:01am
GB wrote: "I'd like to get a show of "hands" of you all that have help craft legislation that has actually been adopted by any level of government."

I think you hit the nail on the head there. I suspect few hands went up. Forging and shepherding legislation through is very time consuming work.
Comment by David Jacobs on May 15, 2009 at 9:57am
Bruce: I would never claim Hawaii is a cheap place to retire. But if you are going to retire in a high cost of living area, Hawaii has low taxes for retirees compared to many other high cost of living areas (e.g., in California, New York, etc).

You are correct, IRA and 401K money that was funded by salary deferral will be taxed by the state when withdrawn.

Property tax guess - If I assume you paid around $100K then your property taxes could be as low as $120/yr if it is in Louisiana. But I would guess your taxes are a little higher say $500 :-).

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