Political Insiders Reap a Tax Credit Under Act 221

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The list of CEO’s of some of the insurance companies that have reaped huge
tax breaks under Act 221 reads like a Who’s Who of Hawaii political
insiders. Two of the companies, Royal State and DTRIC, have directors who
are also directors or officers of the HGEA and UPW. Their influence is
undeniable and the unions clearly control the investment decisions of those
insurance companies. The public should be outraged that public employee
unions whose main purpose should be to get pay raises and benefits for state
workers, are able to claim tax credits that allows them to pay little or
nothing in state taxes or even get tax refunds on the income earned by the
insurance companies controlled by them. Lowell Kalapa of the Hawaii Tax
Foundation has said, “It’s like these guys are sucking their own well dry.”

Act 221 allows generous tax credits to companies that invest in high
technology business that are supposed to create permanent jobs in the state.
It is unclear how many new jobs have actually been created by the credit.
Unlike tax deductions that are used to calculate the income upon which
income tax is based, credits are subtracted from the taxes owed. When
credits exceed the amount of taxes owed the state has to cut a check for the
amount of the overpayment or are credited with that amount towards taxes due
in future years.


While the credits are supposed to be earned for investments in “high tech”
ventures, tax officials point out that it has also been claimed by one-shot
movie deals who are mostly non-resident companies. One of the more
questionable provisions of the Act allows the non-resident companies who may
not need the credit to sell their credits to companies domiciled here, i.e.
insurance companies.

Another highly controversial aspect of the credit is that it is possible to
claim many times the amount actually “at risk” because of the provision that
requires the Tax Department to liberally interpret high tech investments.
The result is that claimants are able to claim many times the amount they
actually spend. We are aware that there are cases where the tax credit
being claimed is several hundred times the actual investment. The situation
is not unlike a person investing $1 and getting $100 in tax credits, and
having $99 refunded to him or getting credit against future taxes.

The result is the loss of millions of dollars of tax revenue that would
otherwise be available to the general fund. The irony is that government
unions that are closely affiliated with the insurance companies taking the
credit come to the legislature each year seeking pay raises and increases in
benefits for their members. The legislature finding itself short of funds
is forced to seek a tax increase or raise fees or cut services to the
public. The end result is that the taxpayers of this state are asked to pay

The question that has to be asked is who let this situation come about and
why is the legislature so reluctant to correct it? Is it coincidence or
corruption? It should come as no surprise that those legislators who
received campaign contributions, endorsement and other help from state
employee unions and their affiliated insurance companies have resisted
efforts to allow the disclosure of the identities of beneficiaries under Act

In the final analysis, state taxpayers end up having to make up the loss of
tax revenues that were given to companies headed by political insiders in
the form of Act 221. We must enact legislation to enable the Tax Department
to disclose those claiming tax credits under the act. Once the ultimate
beneficiaries are disclosed to the tax-paying public there will be a
consensus among legislators to greatly amend or repeal it.

”’Senate Minority Leader Fred Hemmings is the Republican Senator for the district of Kailua to Hawaii Kai on Oahu.”’

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