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How Do We Best Support an Innovation Economy?

Aloha TechHui Members:

We would like to hear your opinion on this important issue for tech companies in Hawaii. After passage of Bill 199 restrictions on Act 221 tax credits in the last Legislative session, what legislative measures do you support to make investment capital for funding tech companies available in the next Legislative session in January 2010. Please take a few moments to fill out the TechHui survey. You can also post any write-in comments to my onsite blog on the subject. Mahalo nui,

Leighton Chong

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Comment by Bruce Campbell on October 5, 2009 at 9:09am
Hi Patrick,

If there is no compelling reason to continuing locating in downtown Honolulu, Kapolei has cheaper housing and thus cost of living....plus some nice surf breaks that not so crowded. Welcome to West Oahu...
Comment by Leighton K. Chong on September 29, 2009 at 8:07am
Hi Patrick:

Your employer Superb Internet has experienced a micro-version of being "Superferried". You have my sympathies. However, if your location is in any one of the following enterprise zones in C&C Honolulu, your company can claim 100% exemption from excise tax for 7 years and pro-rated exemption (80%-70%-60%-50%-40%-30%-20%) from state income tax and the unemployment insurance tax:

From http://hawaii.gov/dbedt/programs/ez/locations:
Zone LocationsDocument Actions Each county can select up to six zones at any time for approval by the Governor. Zones exist for 20 years each. Zones can also be expanded into adjacent eligible areas at any time for the remainder of the original zone's 20-year existence. 19 zones currently exist statewide. All or part of the following areas have been designated on the dates indicated:
City and County of Honolulu
Haleiwa and part of Waialua (the area immediately surrounding the old Waialua Sugar mill site)*: OCT. 1996
Mililani Technology Park and parts of Wahiawa: OCT. 1996
Waipahu (old Oahu Sugar mill site), Pearl City (Manana parcel), Waipio (business park), and Waiawa: OCT. 1996 (All of Kapolei, and most of Campbell Industrial Park, Ewa, and Kunia were added to this zone in March of 1999.)
Urban Honolulu (airport, Kalihi, Iwilei, downtown, Ala Moana): APRIL 2001
Leeward Oahu: APRIL 2001
* - This zone was expanded by the Legislature (effective 12/31/96) to include all agricultural lands in the Waialua district until June 30, 2002. In November of 1997, the Governor approved further expansion of this zone by the City and County of Honolulu to include parts of Pupukea and Mokuleia for the remainder of the original zone's 20-year lifespan. The Governor also approved another expansion of this zone by the City and County in January, 2001, from Pupukea to Ka‘a‘awa on the windward side of Oahu. This expansion will also remain in effect for the rest of the original zone's 20-year lifespan.
Comment by Patrick Ahler on September 29, 2009 at 7:44am
Thanks Leighton,
That's definitely very informative. Regarding the third option I have some experience with that program and it's restrictions though. There is a serious limitation in the requirements in that it doesn't allow startups using PEO services like ProService Hawaii, which many startups do, to apply.

Here's an example of an issue we're faced with now. My current employer, Superb Internet (www.superb.net/hawaii - insert shameless plug here), moved it's corporate headquarters to Honolulu in part to take advantage of some of the benefits of Act 221. This is a costly move, and within months of arriving the company finds out Act 221 and its tax credits are on the chopping block. Regardless the company has gone on to create 25+ local jobs focused purely on technology and innovation. We're now also faced with a drastically increased unemployment tax as well - you can imagine there are significant frustrations. It seems any incentives to move an innovation focused business to Hawaii are rapidly eroding. Anyways, just thought I'd share.
Comment by Leighton K. Chong on September 23, 2009 at 2:47pm
Hi Patrick:


Mahalo for your comments. I will add them to a listing of write-in comments for future reference.

Re aggressive tax breaks for technology startups, some of the existing Hawaii tax breaks include:
(1) Research Expenditure Tax Credit. A 20% refundable State tax credit is available to a qualified high technology business (QHTB) to its total research-oriented expenditures in any year. HRS §235-110.91
(2) Intellectual Property Income & Excise Tax Exclusion. Amounts received by an individual or QHTB as royalties or other income derived from any patents, copyrights and trade secrets developed and arising out of a QHTB, are excluded from State income tax and excise tax. HRS §235-7.3
(3) Location in Enterprise Zones. Technology businesses that locate in designated enterprise zones in the State and hire new employees are exempt from State excise taxes and part of their State income tax and unemployment iinsurance tax. See DBEDT website, Enterprise Zones.
(4) Stock Option Exclusion. All income received from stock options of a QHTB is exempt from State income tax liability. HRS §235 9.5

Re promotion and support of growth of science and engineering schools at UH, the key issue has been that over two-thirds of graduates cannot find jobs in their field in Hawaii. We definitelly do need to find ways to bring more tech jobs to Hawaii.

Re tiered tax breaks for tech companies, this is similar to the first item.

I agree with you that our salaries for tech employees need to be comparable to or higher than the Mainland due to our generally higher cost of living. This so-called "Paradise premium" as well as the few options for top-tier schools for the children of top talent transplanting here has been a tough issue all along. Federal and State tax laws already permit business travel costs to be deducted against business income, but it cannot be used if there is not enough income to write off against. Maybe the State can offer a 20% refundable credit similar to the one for R&D costs.

Thanks for your input,

Leighton
Comment by Patrick Ahler on September 23, 2009 at 11:05am
I am not up to date on the fine print for Act 221 or Bill 199. Nor am I an expert on legal matters or taxes or venture capital. These are just my suggested resolutions to personal observations of the difficulties of innovative Hawaii business's over the last five years.

1.) Aggressive tax breaks for technology start ups (up to 5 years out) and technology focused companies that move to Hawaii (first 5 years)

2.) Promotion (build cutting edge labs, bring top professors, and advertise it) and support for the growth of the engineering and computer science schools at UH as well as programs to employ those students locally after graduation and provide affordable innovation zones for entrepreneurial activities.

3.) Tiered tax breaks (based off of revenues) for technology focused companies (example: not banks with tech departments) that have proven records of innovation and growth. Requirements should focus on a number of positive growth benchmarks (product launches, patents, new hires, etc...)

Those 3 things could spur on innovation and I think is initially more important than focusing on incentives for venture capitalists. Otherwise it just seems that once the business is successful they will move it to cheaper pastures, also it seems like the government is putting the buggy before the horse. But there are still some major costs/cons to doing business in Hawaii that will be a roadblock:

1.) the cost of living - to recruit top talent local companies have to offer salaries that are even higher than mainland tech companies offer (allow companies to offer tax free rental/food stipends w/ limitations)

2.) the cost of moving/travel - interaction with industry partners/competitors spurs innovation and business travel costs from Hawaii are 3 to 4 times more expensive than that of mainlanders (write offs for business travel w/ limitations).

Want more ideas? Feel free to message me.

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