Are Hawaii's Tech Tax Credit Worth the Cost?

Comment

Comment by GB Hajim on December 29, 2008 at 8:01pm

This is a ten year payback to the State only in the form of the income tax base of the employees. Remember, the investors are getting paid back during this time, corporate taxes are being paid, but most importantly there is more capital in the state! Two of my employees bought new cars for the first time. So the car dealership bennies too from this and so on.

The vision for my company is that we won't need the incentive after a couple of years and yet I expect we will continue to grow.

IMHO, the goal for this incentive is to get our companies to a point where they are sustainable without such lucrative tax credits. Maybe the legislature should look at how the companies are performing and how they use the capital (I'm against the huge executive salaries and comp packages that many of these companies are doing) I know for a fact that many of the people that set up these companies take a big chunk off the top of the money they raise.

Believe me - it is still very hard to raise venture capital even with these incentives.

Sorry for the meandering rant, I'm typing with one hand while putting my 3 year old to sleep on my other arm

Comment by John on December 29, 2008 at 4:56pm

Hi GB,

Thanks for offering up an analysis.

Let's assume your numbers: $75,000 cost per job (in tax incentives); 15 year job life, $85k annual compensation, $1.275 M total compensation over 15 years; total $102K income tax created

This generates a 10 year payback period. While we could do a more involved financial analysis (factor in the cost of capital, time value of money, etc), this gives us a good approximation of its value.

The problem here is that a 10 year payback is a very poor investment. There are lots of other uses of funds that have 1 or 2 year payback periods. Prudent organizations should prioritize putting limited funds into them.

And while one may also want to factor in the ancillary income and business, I would question the average life of a job in a startup being 15 years. Most of these companies will fail (most startups anywhere fail) and even if they do succeed, 15 years is a long long time given all the corporate changes we continue to see.

The reality is most states in the US will need to make incredibly hard choices in the next few months and years. Inevitably, many people will lose their jobs and suffer financial stress. It's impossible to avoid. The best we can do is figure out the most effective way to structure cuts.

And, Dave, I am happy to participate in a discussion group that meets and works towards real actions.

Comment by GB Hajim on December 29, 2008 at 3:07pm

(I probably wouldn't fire them. Since I trained them, some since high school, I'd probably altruistically go down with the ship.)

Comment by GB Hajim on December 29, 2008 at 3:05pm

"- Depending on what figures you use, the cost to the state per job created is somewhere between $140,000 to $530,000"

You see these numbers are ALL wrong. 10-25% of business is overhead. In high tech it is probably on the high end with tech needed to be replaced often and power bills through the roof. Start up costs of initial installations can run 50-70%. This is non-wage based spending in our state. Watumull is correct. With all the subcontractors involved (because they can't afford to hire them because Healthcare costs), the numbers are closer to 4000. Now, you are looking at ~ $50-100k per job. At my company, it is about $40k of tax incentives per job created.

AND: The average life of a job is 15 years. Tech jobs typically pay around $85k. That's $1.275 million of salary per job. That's $102k in income taxes from those jobs created. So, even not including all the ancillary income and business generated in this state we come out ahead.

AND in the beginning of the tax incentives there were loop holes Hollywood was driving the Titanic through...not all of them have been closed, but there has been a lot less abuse.

Without those incentives? At this point, I'd have to fire my employees and move my production company overseas like the rest of Hollywood (LucasFilm- Singapore, Pixar - Banglore, Film Roman - Korea, and on.)

Comment by Dave Takaki on December 29, 2008 at 3:02pm

Hi John,

We should understand that the recent report released by the Department of Taxation is part of the current administration's budget trimming measures. Signals have been floated for several weeks that the state government was looking at Act 221-215 to help balance the budget to be submitted. By using more restrictive TIRs the administration keeps it internal and avoids going through the legislative process to reduce the amount of tax credits allowed. That the Department of Taxation (DOT is used too often referring to Transportation) can already predict savings without knowing what applications will come in is a disturbing sign. While the points you raised recently have merit, all of us should be concerned that the Tax Director not manipulate the process in a manner that stretches statutory interpretation.

Misgivings about the Acts

Much of the companion acts' wording reflects the imperatives of venture capitalists, and not necessarily the needs of operational companies. The comments on tax credits related to actual job creation, while not new, is a good place to start a review of what "tech" companies need to grow and the dynamics that truly reflect "economic development" in a geographically isolated pocket market.

Economic development is and has always been more about "warp and weave" than individual skeins or threads.

May I suggest that we set up a discussion group (that actually meets) which could lead to an action committee that would express our views to the legislature and the larger business community. If we want something done right, it is incumbent upon us to shake a leg and express ourselves.

By this I don't mean something merely relative to the upcoming legislative session; we should establish a presence...

Comment by Daniel Leuck on December 29, 2008 at 2:16pm

Hey John - Thank you for posting this link. I didn't realize the DoT had released their Act 221/215 report. At first pass I agree, it doesn't look good. I think its important to separate the idea of Act 221 from the implementation. I believe a more carefully constructed package of incentives with an eye to successful and unsuccessful programs in countries like Ireland, Singapore, India and Australia could produce a strategy with greater efficacy. You are obviously correct in saying this position needs to be defended by more in depth analysis. I'm hoping someone getting paid to do this will provide it :-) For now all I can offer is examples of successful tax incentive programs in the aforementioned countries. We can learn an equal amount from those that weren't successful.

BTW - I hope the people behind this analysis aren't the same guys telling me my SaaS company isn't a software venture and that Google wouldn't have qualified under Act 221 if it were a Hawaii company.

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