Hawaiʻi's Technology Community
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.
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.
Views: 532
Comment
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Comment by Bill Spencer on April 23, 2009 at 8:52am
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The legislature establishes intent. It is up to DoTax to make the rules. I have worked with DoTax and they are very open to input from industry when crafting rules. Kurt and his staff are very reasonable and willing to work with industry. If you look at the law and the requirements for qualifing, SAAS would qualify if the company is in R&D mode and developing applications. As soon as it starts commercializing the software, then 75% of the activity has to be in Hawaii. The other key with software is the business model and with software licensing is the key. If SaaS licenses acess to their software to the end user it would work. If it makesmoney by advertising on the site instead of licensing it would probably not work. This is why getting professional help crafting the comfort letter ruling is so important. The legislature is not the place to craft rules and regulations.
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Comment by GB Hajim on April 23, 2009 at 8:08am
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Of course expecting that is giving them WAY too much credibility.
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Comment by Bruce M. Bird on April 23, 2009 at 7:23am
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Well, in that case, well said!
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Comment by Daniel Leuck on April 23, 2009 at 6:52am
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Aloha Bruce.
I think that your issue should be more with the way in which the law is currently written than with the DoT's interpretation of it.
This is precisely my point. It is the legislature's job to solicit advice from experts and produce sufficiently unambiguous laws. Failure to do so results in what is effectively lawmaking by bodies less qualified to do so.
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Hi, Dan. Oops, I sent my previous message before finishing it. The last part of it should have read "The way to address this might be simply to list examples of allowable software activities --including SaaS-- and to indicate that this list is not meant to be an exhaustive one".
Also --and my sense is you already know this-- some SaaS providers go the "entertainment activity" route rather than the "software activity" route when qualifying as a QHTB under Act 221/215.
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Hi. GB & Dan, you make some good points.
Dan, you wrote "We should leave as little as possible to interpretation by the DoTAX. For example, they shouldn't be deciding if SaaS companies qualify as QHTB software companies. To someone in the field, it's apparent from the very question that they have no understanding of the modern software industry. "
While I agree with most of your point --it would seem to me that SaaS would be precisely the type of high-tech activity that the Legislature would want to encourage-- I think that your issue should be more with the way in which the law is currently written than with the DoT's interpretation of it.
The way to address that would be
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So if 1451 will not see the light of day, how will we get our way?
Like I wrote, I have a feeling my rep was right. They will pass SB199 with the 90% and 1:1, but place the end of the tax credits as they are now in the near future instead of the past. I do hope they give us at least all of 2009.
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FYI not likely that 1451 will see the light of day. Good news is that Fukunage is on the conference committee. The fight will boil down to Cap vs. 1:1. Pono/Choy want 1:1, we want a cap. limiting investment to $100M saves $127M, 1:1: might save a little more, $135M but kills mailand investing and will likely chill out local investing all together.
The salary issues being brought up could never be part of 221. Any 221 companies with exec salaries of the magnitude you suggest are clearly companies without any kind of BOD/Investor governance. I think it would be ridiculous to pay execs $250+ at the start-up level. Very unlikely scenario and I've never seen any Hawaii Angel backed company with that kind of exec salary structure. Offensive yes, reality, no.
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Ah - I see what you are saying. The idea of a suit with no specialization taking $500K salary from a 221 company is certainly offensive.
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Thanks for the props Dan!
When I was thinking about compensation caps, I was thinking in terms of limiting the money grabs by the founders of these start ups, not reasonable salaries. Like capping total compensation for each individual at $250k per year until their company stops taking the credits. I think you would agree that is a good chunk of change. I do know that some have compensated individuals at $500k+ while starting these companies. Often these are people with no film or technical experience, just good at raising money. So they are not being paid to actually produce anything, they are, in effect, taking a chunk of the money they raise...our tax dollars...off the top.
My rep says that SB199 is solely going to be modified to address the concerns of retroactive penalizing investors. I hope they have someone with some insight to guide them!
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