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The Honolulu Advertiser
Posted on: Sunday, April 11, 2010

High-tech tax credits under fire

BY Derrick DePledge
Advertiser Government Writer

State House and Senate negotiators, using a scalpel to cut state spending and avoid a broad-based tax increase, agreed yesterday to delay high-technology tax credits for investors to help reduce the state's budget deficit.

Investors would not be able to use the technology infrastructure renovation credit or the high-technology business investment credit to offset their state tax liability for three years, which would save the state an estimated $93 million a year.

Lawmakers also agreed to repeal the technology tax credits in May, rather than at the end of December, which would save an additional $13 million.

Many investors are disappointed by the agreement and are considering legal action, arguing that lawmakers are suspending tax credits on investments that have already been made.

But many lawmakers believe delaying tax credits that predominantly benefit higher-income investors, insurance companies and banks is better than making additional cuts to essential state programs or a broad-based tax increase that would disproportionately harm the poor and middle class.

"When you tax somebody, you're actually taking something. When you defer, you're just kind of borrowing and they are going to get it later," said state Rep. Isaac Choy, D-24th (Mānoa), an accountant and one of the negotiators.

House and Senate negotiators, meeting in conference committee, also agreed to a 1-cent increase in the tax on cigarettes and little cigars starting in July, which would bring in an estimated $10 million a year.

The cigarette tax was already scheduled to rise by 1 cent in July, so under the agreement, the tax would rise by 2 cents per cigarette, to 15 cents, and then to 16 cents in July 2011. The little-cigar tax was set to rise by 3 cents in July, so now it would rise by 4 cents per little cigar, to 15 cents, and then to 16 cents in July 2011.

The tax increase on tobacco wholesalers and dealers would likely be passed on to smokers. Tobacco tax hikes are considered regressive, since they are felt more by low- and middle-income residents, who also have higher rates of smoking.

Negotiators also agreed to cap itemized state tax deductions for higher-income residents individuals who earn $150,000 a year and couples that earn $300,000 which would save the state $26 million a year.

The full House and Senate will now consider whether to give final approval to the agreements and send the bills to Gov. Linda Lingle.

Lawmakers appear ready to end the state's experiment with high-technology tax credits commonly known as Act 221 after a decade of conflicting reports about whether the incentives have been effective. Investors believe the tax credits have worked as intended to provide seed money for technology and entertainment projects, while critics believe the tax breaks are overly generous and have not met expectations for job creation.

Investors can use the tax credits to offset their state tax liability over five years and can carry forward unused tax credits that were earned before May 2009 so the credits would remain alive even though the program is being repealed.

Lawmakers agreed to extend the tax break for research activities for one year, but they would repeal the technology tax credits sooner than expected and delay investors' ability to take advantage of tax credits earned for three years.

Jeffrey Au, the managing director of PacifiCap Management Inc., said investors put their money into projects with the expectation of receiving the tax credits as outlined in state law at the time.

He questioned wheth- er lawmakers can retroactively change the terms of the tax credits without violating the due process clause in the Fifth Amendment of the U.S. Constitution.

"It could create a huge cash-flow problem for some people," he said.

Au also believes that delaying the tax credits will discourage investors from putting additional money into the projects and, more broadly, have a chilling effect on overall investment in Hawai'i, since investors may determine they cannot rely on state tax law to remain consistent.

"I think you've got to think about the longer-term implications of this," he said.

State Sen. Donna Mercado Kim, D-14th (Hālawa, Moanalua, Kamehameha Heights), one of the negotiators, said the tax credits would not be taken away.

"We're not in fact taking away the credit. It's a deferral," she said.