Hawai'i's high-technology tax credit program cost the state $135 million last year, with an estimated $202.5 million more of the credits to be claimed this year and in coming years.

The estimates are included in a new state Department of Taxation report, which terms the tax loss as being significant but says the credits helped pump money into local qualifying businesses during a nationwide credit crunch.

The report also alludes to lackluster results to date in terms of job generation, while noting there was a jump in the number of companies turning profits. But it also says more time is needed to see if the credits contribute to the state's economic diversity.

The report is one of two the tax department produced on the program commonly referred to as Act 221 as people try to gauge the worth of the sometimes-controversial program. The tax credits are easily the most generous offered by the state in terms of their cost to taxpayers and the size of the credits.

Before a change in the law in May, investors in high-technology, performing arts and renewable energy businesses could put up to $2 million in a company and expect to claim all of that against Hawai'i taxes they owed over a five-year period. Moreover, a provision in the law allowed some investors to claim more than what they put in.

The liberal tax credit opened a spigot of investment into such companies, with credits claimed and credits to be claimed in the future totaling $775.9 million from investments made between 1999 and 2008, the report said.

That includes the estimated $135 million of credits last year and the $202.5 million that can be filed for in future years.

"I don't know of any industry the state subsidized to the tune of $135 million," said Lowell Kalapa, head of the Tax Foundation of Hawaii.

"It's larger than what the state shares with the counties from the TAT (transient accommodations tax). It's a lot of money."

LONG-TERM GOALS

But proponents say the program has been beneficial and is accomplishing goals. The tax credits were enacted to help jump-start state efforts to build a high-technology industry here to diversify the economy and provide high-paying jobs to local residents.

The state's high-technology industry has grown since the time of the first tax credit legislation in 1999, with companies such as dengue-vaccine developer Hawaii Biotech Inc. and medical software developer TeamPraxis LLC taking root.

At the same time, the tax credit also has been used for less-permanent ventures such as TV and film projects. In some cases, banks and insurance companies in the state have established subsidiaries in which they place information technology operations and receive the credit.

Some of the high-technology ventures may have had problems attracting funding and the report shows the credit has helped in the important area of capital formation.

Between 2000 and 2008, at least $1.37 billion flowed into such investments here.

WEIGHING BENEFITS

Last year, as credit markets froze and borrowers had a tough time getting loans, investors poured $265.7 million into the program's qualified activities — companies involved in high-technology, performing arts or renewable energy businesses.

"I think this conclusion speaks for itself and is very good news," said Jeff Au, managing director for PacificCap Management Inc., a Honolulu-based venture capital fund that has made use of the credits.

He also points to other benefits the investment provided in 2008. The Act 221 companies provided employment for 4,701 full- and part-time workers, temporary employees and independent contractors. Spending by the companies in the state amounted to $378.2 million during the year.

"The benefits of Act 221 have far exceeded their costs, on both an annual and cumulative basis," said Au, comparing the companies' spending to the tax credits claimed.

Moreover, he said, the amount of investment being generated is far in excess of the credits being claimed.

JOBS TOTALS UNDERSTATED

The report is gleaned from forms filed by companies that have received the Act 221 investments since June 30, 2007. As such, not all the information about the performance of the tax credits is known because not all companies whose investors have used the credits are filing reports.

Au said because of this, the report understates the number of jobs created here and doesn't include a complete accounting of successful companies. He said the actual investment amount might be higher than what's being reported.

The report was drawn from 203 companies that filed the required forms. Among the other findings drawn from the report and one for 2007:

• Average annual wages for full-time workers fell to $71,679 in 2008 from $76,790 in 2007.

• The total number of full-time, part-time and temporary workers declined to 1,861 at 203 companies. A year earlier there were 2,245 at 177 companies.

• There was a spike in use of independent contractors, with the total rising to 2,840, or 722 more than in 2007.

• Total compensation for independent contractors and full-time, part-time and temporary workers rose to $235.1 million from $221.0 million a year earlier.

• The majority of investments — $111.8 million of the $265.7 million invested in 2008 — flowed into performing arts companies.

• The majority of the 203 companies fit the mold of a startup that is developing technology with little in the way of profits. Only 59 of the companies had revenue that exceeded expenses.

• 110 of the 203 companies had been in business for more than three years.

The report noted the number of jobs created has been disappointing, though its research isn't complete and there could be more as companies grow. It also wasn't conclusive whether at least a portion of the businesses being established were viable in the long-term.

NOTABLE OMISSIONS

State Tax Director Kurt Kawafuchi wasn't available to discuss the report. The report didn't include a compilation of the patents and other intellectual property the companies own, such as had been included in last year's study. It also didn't include cumulative spending and revenue numbers.

A recent paper by three economists from the University of Hawai'i Economic Research Organization found the credits were poorly designed and that it was difficult to quantify their benefit to the state in terms of jobs and out-of-state investment.

And while the tax department report does include some information on jobs and investments, it is not likely to satisfy proponents or critics of the tax credit. At this time the exact number of successful companies that have been helped by the credit, as well as the numbers of companies that were started and failed, is unknown.

"We don't have enough information," Kalapa said.

POSSIBLE CHANGES AHEAD

No information is available on the amount of taxes being generated by those still operating, or how many have used the credit and then moved operations out of state.

Moreover, little has been done to compare the tax subsidies provided to investors in Act 221 against other alternatives to boost the economy, such as what would have happened if a $135 million state tax cut was in place last year.

Proponents are expected to seek changes to Act 221 in next year's legislative session after the law was changed this year to limit the amount of credits claimed annually to a maximum of 80 percent of an individual's state income tax liability.

The change also prevented Mainland investors from trading state tax credits with local investors.