While passing measures to curtail spending and raising taxes to fix state budget shortfalls are necessary to close budget gaps, the state of Hawai'i would be taking a major hit to its reputation among investors if it passes Senate Bill 2401, a measure that would temporarily deny investors the tax credits they were promised, and they depended on, when they decided to invest in Hawai'i.

That mark on its reputation could drive much-needed investment away from Hawai'i right now and for years to come.

SB 2401 would suspend high-technology investment tax credits, a vehicle that, along with other tax credits, was designed to diversify the state's tourist-dependent economy. The credits, most often referred to as Act 221 credits, are responsible for pumping more than $1 billion in private investment into Hawai'i, creating thousands of jobs and advancing regional businesses.

In exchange for that investment, Hawai'i committed to providing investors state tax credits over five years, as well as the right to carry forward any unused credits until they were fully used.

Now, under a proposal that the Legislature will vote on soon, the state is looking to defer its commitment. SB 2401 would suspend the ability of taxpayers to claim the state's Technology Infrastructure Renovation and High Technology Business Investment Tax Credits. The bill states that these suspended tax credits "may be claimed in taxable years beginning in 2013 and the following taxable years until exhausted."

This action could spell disaster in an economic environment in which obtaining financing is already difficult.

Despite its intent to generate more revenue to fund essential public services, SB 2401 is flawed.

A state legislature's retroactive delay or elimination of the ability of an investor to claim an authorized and approved state tax credit will have an immediate and chilling impact on the investor community's willingness to make future investments in that state.

That chill could be felt for many years as investors, who have committed their capital with the expectation that they would receive the tax credit incentives, will lose faith in the state. The long-term effects of such an action will then spread well beyond the state that enacts such a retroactive change, potentially harming the state's national reputation as investors and businesses lose faith in a state's willingness to honor its commitments.

It is easy to see how this loss of faith could extend to investors who have purchased bonds issued by the state. If this action weakens the confidence of those who hold the state's municipal bonds, then the value of those bonds in the open market could decline, making it more expensive for the state to borrow money.

At a minimum, passage of SB 2401 would most certainly cause investors to question whether Hawai'i might take similar action when it comes to its other state tax credit programs, like the state's low-income housing tax credit program. This year, that program has more than $1.3 million in state low-income housing tax credits to allocate, as well as more than $2.7 million in federal low-income housing tax credits.

It is almost certain that passing SB 2401 would devalue these as well as other state tax credit programs, discouraging many if not most tax credit investors and setting in motion a domino effect that would have far-reaching repercussions in the tax credit investment community.

Ironically, nearly 17 years ago, in November 1993, then-U.S. Sen. George Mitchell, chairman of the Senate Finance Committee, wrote me a letter regarding the federal low-income housing tax credit and the ability of investors to rely on the federal commitment to let investors claim the credits as promised.

In the letter, Mitchell said, "I have no doubt whatsoever that the promised benefits are secure over the year period spelled out in Section 42." Mitchell understood the importance of investor confidence that Congress would honor its commitments. That's a message the Hawai'i Legislature needs to hear.

Finally, the constitutionality of SB 2401 is in question. Margery Bronster, a former Hawai'i attorney general, has suggested that the bill may not only violate due process protections in the U.S. and Hawai'i constitutions, but could also amount to an unconstitutional taking without just compensation.

SB 2401 would most likely lead to costly legal challenges. Costly both to the state and to investors, as investors seek to force the state to honor its commitments.

Defaulting on contractual commitments is never good policy. And at a time when business investment could be central to improving the state's economy and improving state tax collections, it's clearly the wrong choice.

Michael J. Novogradac is the managing partner in the San Francisco office of Novogradac & Company, a national certified public accounting and consulting firm. He has more than 25 years' experience specializing in affordable housing, community development and renewable energy tax credit matters and is the author of numerous tax-credit articles and books. He wrote this commentary for The Advertiser.