The current Act 221 investment credit is too generous and costly to the state and its taxpayers, and must be changed to benefit our residents and genuinely diversify our economy. During this period of economic difficulty taxpayers should not be expected to subsidize a group of private companies at a rate of more than $100 million per year without full consideration for what that money gets the state.

Currently, the Act 221 tax credit allows investors with Hawai'i tax liability to claim a 100 percent tax credit for the amount invested in qualified high-technology businesses. These investors are also allowed to acquire additional Act 221 investment credits by trading their stake in the high-tech company with investors that do not have Hawai'i tax liability. As a result, some investors have generally been able to claim anywhere from 100 percent to 200 percent of the amount they invest.

Moreover, the state does not have control over how much is spent to subsidize these high-tech companies because there is no aggregate limit on the amount investors can claim. Please keep in mind that no other state in the United States has a high-technology investment tax credit as generous, or as costly, as that of Hawai'i's. The next most generous investment tax credit is offered by Ohio, which provides a 30 percent tax credit for amounts invested in qualified high-tech companies and limits aggregate claims to $30 million each year.

Some may argue that the Act 221 investment tax credit is a good thing because it shows Hawai'i's unparalleled commitment to high-technology businesses. But it also shows that there is an unparalleled shift in tax burden that goes beyond incentivizing an activity to simply subsidizing it.

Act 221 companies have received $1.2 billion in investments between 2000 and 2007. At the same time, an estimated $747 million in tax credits have been claimed for investment made through 2007. More credits will be generated until the current law sunsets in 2010. The credits generated may be claimed indefinitely into the future.

Despite the huge outpouring of tax revenue, only 2,065 full- time jobs, 165 part-time and 644 temporary jobs existed in 2007 in those companies that received credits. They also hired 2,146 independent contractors. This employment creation falls far short of what the act was supposed to accomplish and has meant Hawai'i taxpayers have paid hundreds of thousands of dollars per job — a costly way to deal with our employment needs.

While no one can deny that diversifying the economy is advantageous to the state, and high technology and renewable energy are very important in this respect, there needs to be balance in the state's approach to incentivizing these activities. As a result, there should be more requirements for how investments are made and what measures are used to determine success.

Supporters of Act 221 see nothing wrong with the high-technology industry receiving almost $750 million in tax credits because they believe the jobs created, the revenues and expenditures generated, and the taxes paid justify it. However, the role of government is not to subsidize private businesses, it is to incentivize them to compete in the market.

We are ultimately doing a disservice to the state's high-technology industry if the only way to sustain these companies is to provide an extra-generous tax credit that no other industry enjoys.

Kurt Kawafuchi is the director of the Hawai'i Department of Taxation. He wrote this commentary for The Advertiser.

Reach Kurt Kawafuchi at (Unknown address).