STAND. COM. REP. NO. 3019

                                   Honolulu, Hawaii
                                                     , 2000

                                   RE:  H.B. No. 2901
                                        H.D. 2
                                        S.D. 1




Honorable Norman Mizuguchi
President of the Senate
Twentieth State Legislature
Regular Session of 2000
State of Hawaii

Sir:

     Your Committees on Education and Technology and Commerce and
Consumer Protection and Economic Development, to which was
referred H.B. No. 2901, H.D. 2, entitled: 

     "A BILL FOR AN ACT RELATING TO THE NEW ECONOMY,"

beg leave to report as follows:

     The purposes of this measure are to:

     (1)  Consolidate state agencies that support technology-
          related businesses;

     (2)  Allow qualified high technology businesses to sell
          their unused net operating loss carryover to any other
          taxpayer;

     (3)  Expand the income tax exclusion for royalties and other
          income from high technology businesses;

     (4)  Allow partnership investors the flexibility of
          allocating the high technology business investment tax
          credit among partners without regard to their
          proportionate interests in their partnership investment
          vehicle;

     (5)  Make the high-technology business investment tax credit
          and the tax credit for increasing research activities
          refundable to the taxpayer or allow the credits to be

 
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          used against the taxpayer's income tax liability in
          subsequent years until exhausted;

     (6)  Conform the state tax credit for increasing research
          activities with the federal tax credit;

     (7)  Allow the board of trustees of the employees'
          retirement system (ERS) to invest ten percent of ERS
          funds in qualified high technology businesses;

     (8)  Appropriate funds for education, workforce development,
          and University of Hawaii research and training;

     (9)  Exempt members of the governor's special advisory
          council for technology development from the senate
          confirmation process and from the need to file a
          disclosure of financial interest with the state ethics
          commission; and

    (10)  Promote Hawaii, through a coordinated statewide effort,
          as an Internet and server-friendly place to conduct
          electronic commerce, including entering into
          appropriate public-private sector business
          partnerships.

     Testimony in favor of this measure was submitted by the
Governor's Special Advisor on Technology Development, High
Technology Development Corporation, University of Hawai`i, Hawaii
Business Roundtable, Hawai`i Technology Trade Association,
Salomon Smith Barney Inc., and one individual.  The Department of
Business, Economic Development, and Tourism, Department of
Taxation, Employees' Retirement System (ERS), Hawaii Strategic
Development Corporation, Natural Energy Laboratory of Hawaii
Authority, National Defense Center of Excellence for Research in
Ocean Sciences, Tax Foundation of Hawaii, Hawaii Venture Capital
Association, Venture Investment Associates, Inc., Big Island
Business Council, and one individual submitted comments.

     Your Committees find that this measure would continue and
build on the work begun with Act 178, Session Laws of Hawaii
(SLH) 1999, to encourage the growth of technology related
businesses in Hawaii.  Your Committees have heard broad support
for many of the concepts in this measure that would continue the
momentum to create an environment for a flourishing high
technology industry.  Your Committees have also heard that the
primary concern of many of those who testified is the proposed
consolidation of state agencies under one entity, and notes that
under Act 178, SLH 1999, the Governor's Special Advisor on
Technology Development already has the authority to develop a

 
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plan for reorganization or consolidation of state high technology
agencies.  Your Committees believe it would be more prudent, and
ultimately more efficient to give the Special Advisor time to
develop such a plan, and to work with all parties involved to
ensure that their concerns have been addressed to the extent
possible.

     Your Committees have amended this measure to:

     (1)  Delete Part I, the consolidation of state agencies that
          support technology-related businesses;

     (2)  Delete the expansion of the royalty provision to any
          person, which is a far broader category than the
          current qualified high technology business;

     (3)  Authorize the ERS to make investments in Hawaii
          qualified high technology businesses or venture capital
          investments deemed appropriate by the board, and add
          limited liability companies to the definition of
          "venture capital investment";

     (4)  Change the expending agency for the millennium
          workforce development funds from the Department of
          Labor and Industrial Relations to the University of
          Hawaii;

     (5)  Delete Part VIII, the exemption of members of the
          governor's special advisory council for technology
          development from the senate confirmation process and
          from the need to file a disclosure of financial
          interest with the state ethics commission;

     (6)  Amend the Hawaii tourism authority's provisions
          regarding techno-tourism to include marketing Hawaii's
          technology assets and as a high technology destination;

     (7)  Establish the maka`ainana technology program discussed
          in further detail below;

     (8)  Require the governor's special advisor for technology
          development to report to the 2001 legislature on the
          status of the initiatives undertaken as a result of
          this Act; and

     (9)  Make technical, nonsubstantive amendments.

     Your Committees have added a new part to the measure to
create the maka`ainana technology program.  This program will

 
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provide a vehicle for small investors to invest venture capital
in high technology businesses doing a majority of their
activities in this State.  Your Committees find that to be an
investor in these companies, currently, an individual needs
$2,000,000 in net assets and an annual income of $250,000 or
more.  Your Committees also find that there is insufficient
venture capital moneys in Hawaii.  By providing a vehicle for
small investors, investing amounts up to $20,000, more venture
capital will be available in Hawaii.  The maka`ainana technology
program will be run by the Hawaii strategic development
corporation that will either form a separate corporation to act
as a regulated investment company (mutual fund) under the
Internal Revenue Code or may use private companies based on
requests for proposals.

     In order to encourage investment, the maka`ainana program
may offer an investment vehicle that allow an income tax credit
not to exceed $5,000 or twenty-five per cent of the investment or
may offer an investment vehicle where no credit is offered but
the income distributed by the program is tax exempt from Hawaii
income taxes.  In order to prevent an individual from obtaining
the tax credit and immediately withdrawing the investment a
recapture of credit is included in the tax credit provisions.

     Your Committees believe that the maka`ainana program will
help to involve Hawaii citizens in encouraging high technology
companies to form in Hawaii.

     As affirmed by the records of votes of the members of your
Committees on Education and Technology and Commerce and Consumer
Protection and Economic Development that are attached to this
report, your Committees are in accord with the intent and purpose
of H.B. No. 2901, H.D. 2, as amended herein, and recommend that
it pass Second Reading in the form attached hereto as H.B.
No. 2901, H.D. 2, S.D. 1, and be referred to the Committee on
Ways and Means.


 
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                                   Respectfully submitted on
                                   behalf of the members of the
                                   Committees on Education and
                                   Technology, Commerce and
                                   Consumer Protection, and
                                   Economic Development,



____________________________       ______________________________
BRIAN KANNO, Co-Chair              DAVID Y. IGE, Chair



____________________________       
BRIAN T. TANIGUCHI, Co-Chair       



____________________________       
LORRAINE R. INOUYE, Chair

 
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