By Jay Fidell
On Sunday, January 4, 2009, the headline story in the Advertiser reported “Rich Claim 95% of Tech Credits”. It went on to say that “Hawaii’s wealthiest residents are among the biggest beneficiaries of the state’s tax credits for technology investors.”
The “rich” getting lots of tax credits? That suggests that Act 221 is just an angle for the rich. The article goes on to quote Lowell Kalapa of the Tax Foundation, who has steadfastly opposed 221, for the proposition that allowing the rich to claim the credits is “unfair” because then the rest of us get to pay more toward the costs of government.
Wait, just one minute. It’s not a giveaway - it’s a two way street. You don’t get the credit unless you make an investment. If you invest say $100,000, you get a tax credit in the full amount only if the business remains a Qualified High Tech Business over the full five years. If the company fails before then, you don’t get all your credits, even though you’ve lost your investment. The credit you got may only be of minimal consolation.
This was not explained in the article. And as you can imagine, a fair number of people only read the headlines. The message they would take away would be that 221 benefits only those don’t need any benefits, and effectively penalizes the rest of us, and by implication that 221 should therefore be maimed or killed or left to expire at the earliest opportunity.
Lest we forget, 221 is a tax incentive. The idea was, and should certainly still be, that our economy is one dimensional, mostly tourism, and that it is increasingly urgent that we diversify it. There are not enough high paying jobs here to interest our young, and in fact our best and brightest have been leaving town to find them on the mainland for years. The clear answer – build a tech sector to diversify this limited and vulnerable economy and get into the global mainstream. If you don’t have a significant tech sector, you have to incentivize investors and entrepreneurs to start companies, take risks and forego other opportunities.
The Cayetano administration, and the legislature at the time, in a moment of inspiration, adopted 221 for that specific purpose - to build a tech sector. It was a revolutionary step for Hawaii, and caught the attention of a number of entrepreneurs and investors. Get this too – you don’t integrate a new sector into an existing economy overnight. It takes lots of committed and creative entrepreneurs and investors to do that. They have to be willing and able to put in the time and money, and to take big risks and sometimes big losses, on the way to building successful tech companies. It’s not easy or for the faint of heart.
And to build a successful tech company takes years – to build a successful tech sector takes decades, even in San Diego. You have to nurture, encourage and incentivize them continuously. When the authors of 221 fell out of power, those who followed have not been so inspired. They have not initiated any other incentive to encourage people to build tech companies or a tech sector. Even now, 221 is the only incentive we have.
But the progress envisioned by Ben Cayetano and his friends has not been what they had hoped. Why? Lots of reasons, but clearly including the fact that 221 has been attacked every year since then. Despite her campaign promises to let 221 “run its course”, Linda Lingle has been at war with 221 from the beginning. The tech and business community has given up hope that she will do anything to diversify or encourage development of a tech sector. Many who supported her election in 2002 now express total disappointment.
Perhaps it is just a lack of understanding by Linda Lingle and the article on Sunday’s front page. Economic incentives are not just to give breaks to taxpayers. They are to incentivize desirable economic activities that might not otherwise take place. The credit incentivizes investors to invest. Pursuant to the Tax Office report of last September, for every dollar claimed in 221 tax credits, at least three dollars have been invested. Those investments go to the tech companies and their contractors and employees and into the state's economy. It’s a focused stimulus package, calculated to improve the quality and quantity of our economy going forward.
If you go to war against 221 and have that war on the front page year after year, you have another kind of effect on would-be investors. Why exactly would you want to frighten away or punish investors who would invest in our economy? Everyone knows that local businesses have trouble raising capital from both local and mainland sources. If you beat up on investors, guess what, you lose them – they move on. Indeed, many investors have moved on – they do not and will not invest in Hawaii because of all the controversy this administration has created over 221. We have collectively shot ourselves in the foot.
For myself, I’m getting ready for a Tech Requiem in Hawaii. Perhaps some people think that you can build a tech company or sector with controversy but no capital, or that you can raise capital for Hawaii’s companies in today’s economy without an incentive. Lots of luck. If Linda Lingle, Kyle Yamashita, Pono Chong and Isaac Choy have their way, I think we can kiss our tech assets goodbye. That would be the sad end of the Cayetano vision, the end of an era in which we had hoped to catch up in the global economy, and the end of a gallant effort at diversifying and keeping our young people in Hawaii.
The reason more “rich” people get 221 tax credits is because more “rich” people actually invest in tech in Hawaii. Look not to them in derision, but to yourself – when’s the last time you made an investment in tech in Hawaii. If you did, you’d get 221 tax credits too, assuming, of course, that 221 is still on the books by the time you write your check.