The state handed out more than $108 million in tax breaks in the first three years of a high-technology investment program aimed at diversifying Hawai'i's economy away from tourism and the military.

The most recent figures available show the state granted $49.3 million in technology tax credits in the year to June 2004, up nearly 40 percent from the previous year, according to the state Department of Taxation.

While the value of tax credits is growing each year, it is unclear how much economic activity they are generating because the identities of the companies benefiting from the credits are confidential and the state does not track the number of jobs created.

Supporters of the incentives point out that in recent years Hawai'i's tech industry has grown, with local companies such as Hawaii Biotech, Hoku Scientific and Hoana Medical among the brighter high-tech stars.

Technology tax credits "certainly have been beneficial for those companies that otherwise would be unable to attract growth investment," said John Chock, president of the Hawai'i Strategic Development Corp., which oversees state venture capital investments. "For Hawai'i companies, tax credits have been important to maintaining growth."

But the tax credits, created under Act 221 and now part of Act 215, have also been criticized for being overly generous, failing to produce tangible economic benefits, being shrouded in secrecy and, in some cases, creating only temporary movie industry jobs.

The cost to the state could rise as credits that have been allowed but not yet used are claimed. In addition to the $108.8 million in tax credits claimed as of June 30, 2004, there were about $60 million in additional credits created since 2001 that can still be claimed in the future. That brings the total potential state liability created during the program's first three years to about $169 million.

"I think we can say that it (the incentive program) is growing," said Kurt Kawafuchi, tax department director. Kawafuchi would not speculate on future costs of the program.

"Our focus now is on making it successful," Kawafuchi said. "We're trying to make this (program) a success."

At the current cost of nearly $50 million a year, the tax credit program could easily top $300 million by the time the high-tech incentive program expires at the end of 2010.

Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i, estimated the entire cost could possibly rise to as much as half a billion dollars.

Proponents of Act 221, which includes technology companies, accountants and state lawmakers and officials, argue the credits promote business growth and create new jobs. Four years after the program started there's no doubt Hawai'i's economy is booming, which resulted in a $486 million budget surplus at the end of June.

"Whether the tax surplus would be higher or lower had (Act) 221 not been in effect, we don't know," Kalapa said. "One has to always ask, whether that investment in high-tech is impacting the economy? I don't see it."

Lawmakers last year approved a five-year extension of the technology tax credits until 2010, but, among other changes, removed a provision that the act be "liberally" construed by tax officials. The Legislature also included restrictions limiting research credits to technology companies, added new guidelines on the level of investment credits that can be claimed, and established a certification process for taxpayers claiming the credits.

Gov. Linda Lingle and Kawafuchi last year pushed lawmakers to tighten up the law because of concerns the credits cost too much and were ripe for potential abuse. The state lost $30 million in tax revenue because of "loopholes," Lingle had said.

Although qualifications for the program were raised, the credits still provide a 100 percent or more tax break for technology investments. According to the law, every dollar invested in qualifying high-technology ventures can be used to reduce state tax obligations by $1. The tax credits are spread over a five-year period and capped at $2 million per investment.

Despite changes to the law, the credits are still considered generous compared with those offered by other states.

"The economic question is, is there a benefit from playing this game with other states?" said Byron Gangnes, a University of Hawai'i associate professor of economics. "It's hard to say. Do we have to play that game? Possibly. Is this the best way to play that game? Probably not."

Rather than provide tax breaks to selected groups of taxpayers, the state should focus on other ways of improving the state's business climate such as regulatory reform and lowering taxes for all taxpayers, Gangnes said.

"The broader question is whether it makes sense to issue these targeted breaks to increase specific activities, or whether to try to maintain the lowest possible tax rate on all kinds of activities," he said.

Reach Sean Hao at shao@honoluluadvertiser.com.