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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 Bruce M. Bird on May 15, 2009 at 9:17am
Hi, GB. I agree with you. Your approach strikes me as being much more "inclusive" than Bill's.
Comment by GB Hajim on May 15, 2009 at 6:55am
Without the legislatures who are going to be voting on it, we'd be just spinning our wheels.
Comment by Bruce M. Bird on May 15, 2009 at 4:08am
Hi, GB & Bill. I couldn't help but notice the contrast between your two posts.

GB: You wrote, "...we need to reach out to those legislators who supported and opposed Act 221. Involve them in the process from the start. Address their concerns with facts and outline benefits."

Bill: No reporters from the Honolulu Advertiser allowed in any of the meetings involved in developing "Son of 221".

Bill, what's your "beef" with the Honolulu Advertiser and/or its coverage of Act 221 ? My sense is that you don't have many issues with the pro-Act 221 opinion pieces by Jay Fidell. So, what gives ?

In any event, it just seems to me that the ultimate "stakeholders" of legislation involving foregone tax revenue are the taxpayers of Hawaii. Inviting business reporters from the Honolulu Advertiser to attend some of the "Son of Act 221" sessions would help taxpayers get information with which to make informed decisions.
Comment by Bill Spencer on May 14, 2009 at 10:13pm
FYI...developing "son of 221" is expected to be an inclusive process. All suggestions are welcome. Stakeholders need to work together. The Advertiser is not a stakeholder.
Comment by GB Hajim on May 14, 2009 at 8:04pm
Hopefully with this tech group, I can be included via video chat since I'm on the Big Island...I do want to be clear. I always thought that Act 221 was flawed, but was against throwing the baby out with the bath water. Right now we are in limbo with about a half dozen investors who signed documents before the cut off date (May 1st), but we received checks and some were dated after May 1st. We have to spend quite a bit of time (and money) figuring this out and the State Tax Office is now working overtime (costing us all precious money) trying to respond to all those folks affected.

If we are serious about this we need to reach out to those legislators who supported and opposed Act 221. Involve them in the process from the start. Address their concerns with facts and outline benefits.

BTW Obama's plan? The GAO reported that it is costing the American taxpayer $100k per job created...about the same as Act 221.
Comment by Bruce M. Bird on May 14, 2009 at 7:35pm
Hi, Laurence and GB.

Laurence: You have a great idea. But I'd like to suggest a few things that might at first seem counter-intuitive:

1) Some members of the pro-Act 221 community simply don't want to hear suggestions of any kind regarding how to "improve" Act 221. And a few of them occasionally end up "demonizing" those with whom they disagree. So, somehow, your group has to find a way to "find consensus while mending fences" (hey, that's good!). Maybe "fewer" experts and more "fresh faces" from the high-tech community and other places would make a lot of sense (sort of a "Wisdom of Crowds" approach); and 2) Invite reporters from the Honolulu Advertiser and other newspapers to attend some of your sessions. Maybe invite Sean Hao and Greg Wiles.

GB: You may not realize it, but you are probably one of the most effective advocates for Act 221.
Comment by Bruce M. Bird on May 14, 2009 at 4:56pm
Hi, David. Good point. I was using the word "pensions" when I should have used the phrase "various sources of anticipated retirement income".

My friend has a lot of employee-provided money in his 401(k) plan and in his various IRA accounts. He plans to "draw" from these accounts to provide for most of his retirement "income". He also has a small pension. You are correct that this pension income currently isn't taxed in Hawaii. However, my friend is absolutely positive that the distributions he would receive from both his 401(k) and from his various IRAs would be subject to Hawaii state income tax.

Also, if I remember correctly, there was a bill in Hawaii that died recently that would have taxed pension income in excess of $50,000. This bill was an attempt to somewhat "conform" the law in this area between the various types of retirement income.

I found your point about property taxes in Hawaii to be a real "hoot". Allow me to turn it on its head by using a real-life example. Tomorrow I'm going out to make a bid on a bank REO property. The property is located on the Mainland. It's a 3/2. The property needs about $25,000-30,000 worth of work. My plan is to buy it, fix it up (more or less), and then rent it out for about $1,000 a month. It's located within about 10 miles of a local university.

Take a wild guess on what my property taxes on this rental property will be, No homestead exemption. Again, just take a wild guess. My sense is that you won't even come close.

Here's why. The amount of money you would have to spend to buy a 3/2 in many of the livable areas of Hawaii is, quite simply, "through the roof". So, even if your property tax "rate" is low, you still will have a hefty amount of property tax to pay on the property.

Home prices in some parts of the Mainland are dropping at a higher rate --and from a lower base-- than home prices in Hawaii. And some of these areas are actually desirable retirement areas. Fort Myers, FL. The Florida Panhandle. Vegas, Baby! (Tell 'em Telly sent you...).

Most retirees live on somewhat "fixed" incomes, And some of the states that have a high "cost of living" have somewhat of a hard time attracting retirees.

Your statement that Hawaii is "a very favorable state (tax wise) for lots of retirees" deserves to be nominated for this year's "Hail Fellow Well Met" Award by your local Chamber of Commerce,

While it is a "true" statement for "lots of retirees", for "lots of other retirees", it isn't.

By the way, why in the world would the State of Hawaii want a tax system that "rewards" one set of retirees, both "rewards" and "punishes" another set, and "punishes" yet another ? Go figure.
Comment by GB Hajim on May 14, 2009 at 2:55pm
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 have worked on State and County level legislation both in California (during my college years) and Hawaii. Mostly on land use issues but the same process applies.

I say "adopted by any level of government" because I've worked on election, tax, and education reform without much success.
Comment by Laurence A. Lee on May 14, 2009 at 2:43pm
All the more reason a Round Table composed of the brightest minds, professional investors, and legal eagles in the local Technology Scene would be a good way to go. Members of the Legislature understandably don't have the depth of knowledge that insiders would, and are less likely to do the needed R&D to come up with a workable solution.

If we enough of us got together, did the legwork, and produced a new or revised program that most of us can stand behind, there's a better chance of getting such a successor through. Plug up the holes, fix the long-standing flaws drawing criticism, and start a grass-roots effort.

Easier said than done, agreed... but now that 221 is finally coming to a close, I'm confident that more people are now motivated to move in this direction. Had 221/215 been extended outright, this opportunity to motivate the Tech Community to collectively "fix" the system would not be possible.
Comment by GB Hajim on May 14, 2009 at 2:17pm
David I concur. Remember, even the limited incentives they passed sunset soon. Then we have nothing and will sit in limbo for maybe 2 years or more while the snail paced machinations of the legislature craft a new incentive. Meanwhile tech and film business flee to India, China, and other places. Instead of killing this one, they should have spent that energy on crafting a new piece of legislation that works.

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