Hawai'i's eight-year effort to build a technology industry via massive income tax credits for investors has come to an end.

The technology tax credit program known as Act 221 remains in place through 2010. However, the program now will be substantially scaled back as part of state budget-cutting efforts.

Gov. Linda Lingle had threatened to veto a bill that restricts the high-technology investment credit. However, Lingle yesterday chose not to veto Senate Bill 199, which is expected to save the state about $120 million over two years.

The move left technology industry advocates, who lobbied hard for a veto, feeling betrayed.

"It's another demonstration that you can't trust Hawai'i as a state, as a place to do business," said Lisa Gibson, president of the Hawaii Science and Technology Council.

The incentives, which were created in 1999 and significantly expanded in 2001, provide a tax credit to Hawai'i residents investing in local technology companies. They were created with the goal of boosting Hawai'i's economy and moving it away from dependency on tourism.

Under the changes, which take effect retroactively from May of this year, investors in eligible technology companies can receive tax credits only equal to the amount invested. Before the change, investors could get a maximum tax credit equal to 200 percent of their investment.

Additionally, the new law limits the amount of credits that can be claimed annually to a maximum of 80 percent of an individual's state income tax liability. The changes also prevent Mainland investors from trading state tax credits with local investors in exchange for greater equity in a company.

Industry advocates complained that the changes would drastically reduce the amount of money local and Mainland investors will pump into Hawai'i technology companies.

"It'll kill both local and Mainland investment," Gibson said. "We believe that you're going to see job loss and companies dying. It's another nail in the coffin."

In a significant break, Lt. Gov. James "Duke" Aiona disagreed with Lingle's decision not to veto the bill. Aiona, who is running for governor in 2010, usually does not publicly split with the governor on policy decisions.

"This bill should not have been allowed to become law," Aiona said in a statement. "While I recognize the need to alter certain provisions of the high-tech tax credit, this flawed measure has the potential to cripple an industry that we have worked for nearly a decade to build up in order to diversify our economy.

"Investors and businesses plan years in advance, and fundamentally changing the rules midstream is short-sighted and detrimental to our future. Given the current economic challenges, our policies must convey that Hawai'i is open for business, but this bill sends the wrong message."

GENEROUS PROGRAM

The technology tax credit program is considered among the most generous credits nationally.

The program has been subject to criticism because of its estimated $747 million cost from 1999 to 2007 and questions about the number of jobs created. Proponents have argued that the credits helped diversify the economy, created thousands of jobs and attracted $1.2 billion in investments in companies that spent $1.4 billion locally.

It's difficult to independently confirm the number of jobs created by Act 221 because of the lack of public information.

More than 333 companies have benefited from the credits. However, information released by the state so far is limited to the names of 83 companies and excludes details such as what each business does, how many people it employs and how much money it raised.

TOO-NARROW FOCUS

Tax credit proponents argue that the benefits of the tax credits outweigh the costs. However, the state's worsening tax revenue outlook forced lawmakers to seek cuts to help balance the state's budget.

"They can claim we changed the rules in mid-stream, but I don't think anybody ever anticipated this bad a slump in tax revenues," said Lowell Kalapa, director of the Tax Foundation of Hawai'i. "I don't think the industry is sensitive to the financial situation we're in."

Critics of tax credits in general have argued that the state should strive to improve the climate for all businesses via excise tax reforms and other systemic changes.

"If Hawai'i is not a place where you can realize a profit because of a draconian business climate, then fix it, as opposed to taking care of one type of activity which may or may not prove to be the silver bullet," Kalapa said. "Such favors come at the expense of everybody else."