Hawaii's Tax Surplus and Venture Capital

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The state of Hawaii has been blessed by a great boost in the economy thanks to a blockbuster 2004-2005 tourism season. Arrivals during 2005 fell just short of 8 million visitors.

This combined with low unemployment has resulted in more than $500 million in unexpected tax funds. Government leaders have had a field day contemplating what to do with the surplus as have editorialists and letter to the editor writers throughout the state.


Of course when it comes to what to do with the surplus, my bias forces me to hope that the legislature and the Governor will use some portion of the funds to build a more diversified economy for Hawaii, as clearly the tourism boom will not last forever.

Another good use of funds would be to invest in the infrastructure that drives tourism in the first place. Education seems a likely repository if only DOE could deploy the funds quickly and effectively.

For the last two years, the Hawaii Venture Capital Association has supported the idea of a State Private Investment Fund (SPIF), designed to help build Hawaii’s venture capital infrastructure and create sufficient funding to meet the later stage needs of growing companies and keep them in Hawaii.

Since SPIF was created at a time when state coffers were not so flush, the plan actually does not anticipate costing the taxpayers. This year’s version of SPIF (see HB 3065) uses contingent “refundable tax credits” as security for a line of credit that would be invested with local venture funds who in turn would invest in Hawaii companies.

Since venture capital as an asset class has historically produced returns greater than 15 percent, SPIF is not expected to cost the state a penny. Other states have used models like SPIF, but many have simply allocated money directly into state managed investment organizations. States like Maryland, Pennsylvania and others have had great success stimulating economic growth with this approach.

There is one bill this year that is particularly creative. HB 3064 that calls for direct a appropriation that would be used to stimulate innovation and create commercializable intellectual property as well as fund venture capital investments.

This well intended measure is still being fine tuned by the responsible committees. I commend the legislature for recognizing the need to create a continuum of financing from basic research that creates intellectual property with commercial value to venture capital which can help a company get their innovations to market. This is a very important step toward building a viable science and technology sector that will have a profoundly positive effect on Hawaii’s business climate.

It is heartening that the legislature recognizes the need to leverage the ability of the local venture capital firms and investors who do proper due diligence on promising business ideas and who are focused on generating a return on their investments. Investment with local venture capital companies will strengthen their ability to fund successful companies for years to come.

One way or the other, the legislature and the Governor cannot lose sight of the importance of a strong funding continuum from basic research to later stage venture capital. For Hawaii to build a diversified economy, more venture capital, no matter what form it takes, is essential.

”’Bill Spencer, president of the Hawaii Venture Capital Association, can be reached via email at”’ mailto:bspencer@hawaii.rr.com ”’This editorial is the opinion of the author and does not necessarily represent the views of the Hawaii Venture Capital Association or its Board of Directors.”’

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