Are Hawaii's Tech Tax Credit Worth the Cost?

Comment

Comment by GB Hajim on January 4, 2009 at 10:29pm

Shoots I'm too fired up to stop. When I started this production the economically prudent thing to do would have been to do the production in Eastern Europe where a government was willing to pony up the budget to cover 50% of the costs. My $2.5 million feature would have cost under $1 million with the government of Bulgaria putting up 1/2 of the total!

But that's not the reason I developed this style of animation and this production pipeline. It is not the reason why I go to high schools and the local colleges to teach workshops and classes. The reason in a nutshell: I want to create something sustainable here so that the youth (including my own) can be inspired and our best and brightest can be encouraged to stay here. This tax incentive allows us to reach for that dream.

I did notice that one of the companies benefiting from the tax incentive on O'ahu is off shoring their animated project to Korea. They didn't even ask us for a reel or a bid. I know of a few productions in the state that have sent their visual effects shots to LA when we could do them cheaper and better.

The biggest burn to my company was a few years ago. I bid on doing the A/V media and installations in the 'Imiloa Astronomy Center. This project was managed by UH. They turned me down even though my bid was much lower than the Toronto company that received the contract. More than two years of production time went by. Two months were left. Nothing besides some pre-production notes had been completed. The Toronto company hired a Vancouver company which hired me to do the work. I did my best even though I thought what the Canadian company had planned was rushed and ill conceived. At first they had me send them the work and then they sent it back to Hawaii as their own. But time became too short. I ended up working directly with the 'Imiloa staff. This is not a tax credit related, but it did involve quite a bit of State money. More importantly it reveals the kinds of ill founded misconceptions about the talent and facilities that are available here in East Hawaii.

So, John in the end, you are right about the tax credits not truly working, but I have to protect what we are trying to build here because it means so much to so many.

In this past holiday season, one of my animators gave me a gift and on the card he wrote: "That you for giving me the job of my dreams."

Dudes, that's what this is all about.

Comment by GB Hajim on January 4, 2009 at 9:28pm

And boy does a passionate rant yield typos!!!!

Comment by GB Hajim on January 4, 2009 at 9:24pm

BTW Mahalo nui loa for creating this opportunity for me to sum up my thoughts. I forwarded them to my State reps.

I mua!

Comment by GB Hajim on January 4, 2009 at 9:17pm

It will destroy the lives of my employees. There is absolutely no work on this island for them except my start up. Most of them have never lived away from their extended families. Breaking up an 'Ohana is destroying it. I'm sorry John. Don't take this at all as an attack. I think you raise good points for discussion. But you need to come to the local high schools here and take a look into the eyes of these kids and their parents. Where is their hope for a better life. Where are their options?

How's about this for a compromise? Approximately 90% of the tax credits are claimed by companies on O'ahu where there already is a fairly diverse economy. The unemployment rate is around 7% here and is barely over 4% on O'ahu. Make the credit only for companies with 100% of their payroll employees on the outer islands.

The kid who now does most of my high end Maya stuff - I hired him back when he was 16. His mom couldn't afford to keep him in the same house for more than a few months at a time. He built his own computer, but had no place to plug it in most of his time in high school. He was helping his mom survive by bagging groceries at $7/hr! Now, 3 years later, he is writing render engines, paying his way through college with his wages from my company and recently was flown to the mainland to compete in a software competition. Almost all my employees and interns have stories like this.

Without a very attractive offer you think we could get investors to consider East Hawaii for high tech?

It took me 4 years before I could raise enough interest to get investors.

Remember, the investor has to invest 5 years of tax liability in one year. Most people I know don't have that kind of equity. If they do, you have to convince them to not earn interest (4-7% easy in a solid money market / cash management fund) on that equity and instead give it to you. Even if they are going to invest at only $10k, that is a loss of well over a thousand of dollars over 5 years plus the risk that we go belly up in less than 5 years and they lose the remaining credits.

The key to convince them to put in the equity, take the risk of losing the credit, and give up the earning power of the equity is the turning it into a 200% credit by matching it with investors on the mainland. Seems easy, eh? 200% guaranteed return with minimal risk.

One catch. You have convince people on the mainland, thousands of miles away, that your company, at the edge of a rain forest, staffed by young people out of some of the worst academic schools in the country, that my company, built in a shed that used to be used for a car painting business, is worth them taking the risk of putting up half of the money. If you think that is easy...well, you are my next Executive Producer.

As far as the moral dilemma, there is a problem, but it is not with the tax credit. It is with the sense of entitlement most Americans feel. From the CEOs of Wall Street and "Detroit" who could bailout their companies with their personal wealth, but instead continue to take enormous salaries in the tens of millions while failing to show a profit to people who simply live beyond their means. And here in Hawaii with tech companies' CEO/managers taking hundreds of thousands even millions off the top of the start up simply because they started it.

Like I wrote before, there is no body getting rich here in East Hawaii. Two of my investors had to borrow money to make their investment. They will pay off their loans when they get their tax refund in March.

As far as sustainable companies? When you are talking high tech? I remember a few of my buddies where coding together when they weren't on tour with the Dead. We'd all ask, but how is that going to make money? (to get back on tour - being one of the major goals of that era of my life) They didn't have an answer, but they kept at it because it was something they were passionate about and it revealed the nature of data in a way that few people understood. They had no plan for a revenue stream. Not even a inkling of how it would be sustainable. They called it Go. Go.com and within a few years Disney bought it for more money than I expect any of us will see in our lifetimes. My close friends of this crew, Andy, retired before he was 30 years old.

Do you know the story of WETA in New Zealand? Started with a couple of guys, passionate about film, making a movie where Muppets, that looked straight out of Sesame Street, were shooting at each other with automatic rifles and blowing each other up with bombs. Sounds sustainable? Within 12 years they were in charge of putting the Lord of the Rings together.

I'm sorry if my tone comes across badly. I mean no disrespect at all. I am very passionate about my crew and what were are building here.

Peace.

Comment by John on January 4, 2009 at 7:59pm

While I think the title of the article was poor (obviously rich people are the ones investing), I see two important policy points in the article.

1. The tax credit is essentially a regressive tax that shifts more of the burden to poor people (who cannot obtain the tax credit). You may not see this as a problem but regressive taxation is a legitimate public policy issue.

2. The implication that the tax credit is being used as an elaborate tax shelter for the super rich (average income $600,000). There is a legitimate question: Do these investors really care about their investments or is it mainly a convenient way to get out of paying taxes? Since it is a 100% credit, the risk for these investors is extremely low - perhaps so low that it creates a moral hazard. I, for one, think it matters greatly that investors have significant risk. It pushes investors and founders to work harder and focus more on building sustainable companies.

GB, I am not sure if killing ACT 221/215 will destroy lives. However, because of this recession, I am pretty sure that thousands of people in Hawaii are going to lose their homes and or their jobs in the next year or two. The state has substantial concerns to handle and we need to figure out the optimal solution for the general public.

Comment by GB Hajim on January 4, 2009 at 6:58pm

Yea, Sean Hao is simply on the war path. Today he wrote an article about how most of the people who tax the tax credits are rich.

http://www.honoluluadvertiser.com/article/20090104/NEWS01/901040372

Well, the Federal laws regarding investing are set up so that only rich people and a limited number of non-rich people can invest. It is FEDERAL LAW Sean Hao! Plus, people who make a lot of money obviously have a bigger tax liability. The guy is now just making stuff up to stoke fires against the tax credit. I wrote him and the editors the following:

Subject: Before you destroy the lives of people

Aloha e Sean

I want you to watch our short documentary. It is only a few minutes long. It shows only a few of our employees.

http://www.jaman.com/a/video/0AEMr_74-ioU/

Look at their faces.

These are only some of the lives (and hopes and dreams) you will destroy if your work ends the tax credits. If the tax credits end, my employees and the high school interns are sure to ask what happened, I will tell them ask Sean Hao.

Nobody I know is getting rich in East Hawaii from the tax credits.

I also wrote letters to our State Senator and Representative. I suggest you all do the same.

If Sean Hao writes another anti-tax credit article, I'm join to get the 50 kids and adults who have worked on my project to e-mail the editor of the paper and the politicians.

I mua!

GB

Comment by Dave Takaki on January 4, 2009 at 2:31pm

Hono Advertiser Editorial: Preserve the core intent of high-tech tax credits

"A new study that puts the cost of the state's high-tech tax credits at roughly $747 million from its inception in 1999 through 2007 has raised some eyebrows and some controversy.
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As The Advertiser's Sean Hao reported, the state Department of Taxation shows that the 177 companies benefiting from the tax credits created just 2,245 direct jobs in 2007.

That news is sure to be fodder as the Legislature considers whether to extend the credits, which sunset in 2010.

But not so fast, say supporters of the tax credits. The state's study is fundamentally flawed in that it aggregated the cost of the program over eight years, yet only highlighted jobs created during one year. In reality, they say, the actual costs are closer to $400 million, and when independent contract jobs are included in the mix — as they should be, since that's how many smaller startups staff their businesses — the credits created more than 4,000 jobs.

It's imperative that both sides carefully weigh the benefits of Act 221, which provides 100 percent tax credit for technology investments; the corresponding Act 215, in 2004 tightened qualifications for who can claim the credits.

Clearly the Legislature and the state should not lose sight of the important premise of Act 221, which is increasingly important in today's economy. That is to diversify Hawai'i's tourism-based economy and to build a technology sector here resulting in higher-paying jobs.

There are positive signposts along the way: The report showed average salary for full-time tech-sector jobs was $76,790; the tax credits have generated $1.2 billion in technology investments; and proponents say technology companies have so far spent about $1.4 billion in Hawai'i. That, too, is an important part of the mix.

Growing a new industry, particularly here in the Islands, won't happen overnight. But at a time when the state is weighing increasingly precious dollars, finding a more effective and efficient way to maximize the benefits of these credits makes sense.

So far, the state's push to increase the penalty for companies that take their operations and their jobs out of Hawai'i from 10 to 50 percent, and tightening the definition on who can receive the credits seems reasonable.

The state should listen, too, to tech companies and industry leaders to ensure the changes would not have unintended consequences, which can often be the case when tinkering with tax credit proposals.

Now is the time to get the legwork done on changes that would be proposed in the upcoming session. Both sides must work collaboratively and diligently to protect the intent of economic diversification and job creation.

During these tough economic times, we cannot afford to let those crucial issues get lost in the political shuffle."

The editorial suggests we step to the plate and express our opinion(s). Let's make it so.

Comment by Daniel Leuck on January 1, 2009 at 1:38pm

We just added an Act 221/215 poll to the front page.

Comment by GB Hajim on December 29, 2008 at 8:52pm

I do know that there are very few of these companies in East Hawaii.

Comment by John on December 29, 2008 at 8:16pm

Hi GB, I liked your response. I think it's balanced with both sides of the issue.

Your first paragraph is essentially the happy scenario - everybody does well, the state gets more corporate and personal taxes, the employees spend money in the state,etc.

On the other hand, your second paragraph clearly addresses some of the dangers. In that type of scenario, there may be no corporate taxes paid, no long term jobs created and little, if any, spending in the greater economy.

This brings up two questions:

1. How many of ACT 221 / 215 companies are abusing the credits?
2. How significant is that abuse?

You may only be using $40k in tax credits per employee but that seems to be an outlier from the statistics provided. There seems to be a lot of unaccounted money out there and numerous stories of abuse. What are the other companies doing?

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