Recent controversy over the impact of the tax incentives for high technology and venture capital seems to have been caught up with emotion and lost sight of the very hard dollars and sense side of the issue.

House lawmakers basically rejected any suggestion from the administration that the legislation be fixed to address the abuse of the tax credits available under Act 221. As a result, as losses begin to mount and the amounts claimed has grown from a few hundred thousand dollars to more than $40 million in the year 2001, the pressure to find new revenue to replace the amount lost to the credits will begin to soar.

That’s why it is difficult to understand why lawmakers who were so anxious to override the governor’s veto of several appropriation measures would be so ardent in their defense of these tax credits. It is not like the administration is asking to repeal the credits, but to merely make the threshold black and white so people will be able to understand what qualifies and what does not.

Even business organizations that one would usually think would oppose increases in taxes unilaterally have come to the defense of the Act 221 credits. So will those business organizations be as willing to accept a tax increase to insure the funding of state programs while some taxpayers continue to collect their tax credits from Act 221? Are they willing to sacrifice the outlook for businesses who don=t qualify for these tax credits?

Again, reform of Act 221 is not ”’repeal,”’ it is ”’reform.”’ The two changes requested make a lot of just basic common sense. One change would delete the provision that the law be “liberally construed.” That provision allows almost any activity that may employ some means of high technology to basically argue that it qualifies for the credit. This provision would allow something like the upgrading of a firm’s data storage system to qualify because of the firm’s records would now be placed on a computer system, or for that matter, a live musical concert which is recorded on high technology equipment and reproduced on a DVD might possibly qualify.

The other fix requested by the administration would change the basis for the research tax credit from applying to all research activities to applying only to that amount that represents an increase over the prior year. This latter interpretation is how the federal law is applied with respect to tax credits for research. Thus, Hawaii’s tax credit for research is available to companies who continue to do the same amount of research as last year. Thus, it does not encourage investment of additional dollars in research and more than likely does not create new jobs.

While the defenders of Act 221 claim that the credit will help to diversify the economy, one has to ask at what price and at whose expense? If lawmakers cannot find reductions in state spending and apparently they cannot given the override of the governor’s vetoes, and they are unwilling to stop the hemorrhaging of the state’s tax collections, then the only other alternative is to raise taxes. If that is the case, then what will that mean for all other taxpayers? The tax burden will be cranked up yet another notch and even more businesses will either go out of business or lose their competitive edge in the world marketplace.

Of course, since elected officials won’t want to incur the wrath of their voters, it is more than likely they will target businesses for these tax increases, figuring businesses can “pass” it on to others. Again, the fatal error is that many of the customers they will pass the added cost on to are you and me. And if they can’t pass it on as an increased cost will mean consumers will stop buying the product or service, they will have to absorb the cost by either laying off personnel or cutting hours and benefits for workers.

Finally, lawmakers, as well as taxpayers, should recognize that the Act 221 tax credits are not tax incentives in the truest sense but are merely subsidies of hard-earned taxpayer dollars. Given that they are handouts if they are refundable or they are a reduction of future tax collections if nonrefundable, the tax credits are nothing more than another expenditure program of state government.

To make a clearer distinction, are lawmakers saying that spending on high technology companies is as high a priority as the health and human services that they were so eager to override vetoes for or was that all a show of political upmanship?

”’Lowell L. Kalapa is the president of the Tax Foundation of Hawaii, a private, non-profit educational organization. For more information, please call 536-4587 or log on to”’ http://www.tfhawaii.org

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