RESOLUTION

WHEREAS, Act 221, Session Laws of Hawaii 2001, was intended to encourage the continued growth and development of high technology businesses and associated industries in Hawaii; and

WHEREAS, Act 221 ostensibly provides tax credits of up to one hundred per cent of a company's high technology business investments; and

WHEREAS, Act 221 brought in an estimated $16,000,000 in capital to Hawaii high technology companies in 2001 and more than $20,000,000 in 2002; and

WHEREAS, despite this growth in capital investment, Act 221 has not been without its critics, who charge that Act 221 is overly generous and allows investors to reap high multiples of their investment in tax credits by the use of investor-controlled reserve accounts, questionable subsidiaries, and non-traditional high technology companies; and

WHEREAS, Act 221 only requires that "more than fifty per cent" of a business' activity be in high technology to qualify for the tax credit--which means that for every $200.01 invested in a high technology activity, $100 may be spent on a non-high technology activity, but it also means that investors may deduct multiples of their investment; and

WHEREAS, in certain cases, the tax credit may be taken by someone who has not invested their own money in a qualifying company; and

WHEREAS, Act 221 allows subsidiaries to take existing cash from a parent company and add a small amount of highly leveraged tax-credit eligible investment, then reinvest very little new money (but generate a large amount of tax credits) back into the parent company; and

WHEREAS, under Act 221, performing arts companies are considered "qualified high-technology businesses" which includes film production companies; and

WHEREAS, Act 221 allowed a mainland film company to claim $50,000,000 in tax credits, despite spending only $13,000,000 locally and later selling the remaining $37,000,000 in tax credits at a discount to investors; and

WHEREAS, these film companies are accused of providing a temporary infusion of capital and employment into the State but are not investing or making any long-term commitment; and

WHEREAS, a recent film production company received $18,000,000 in tax credits, which was more than all Hawaii technology companies combined; and;

WHEREAS, Act 221 was also criticized because it lacked administrative oversight, accountability, and cost-benefit analysis; and

WHEREAS, state officials are hesitant to quantify the cost of the tax credits under Act 221 because "it's unclear how many people will take advantage of it"; and

WHEREAS, this inability to quantify the costs of Act 221 may have serious repercussions for the State, especially in light of the Department of Taxation's January tax revenue report that showed tax revenue trailed expectations by $32,800,000 or 9.6 per cent, largely because of lower corporate and individual income tax revenue; and

WHEREAS, if current tax revenue collections do not meet the Council of Revenue projections during the remaining four months of the State's 2002-2003 fiscal year ending June 30, the State will be over its budget by $63,000,000; now, therefore,

BE IT RESOLVED by the House of Representatives of the Twenty-second Legislature of the State of Hawaii, Regular Session of 2003, the Senate concurring, that the Legislative Reference Bureau is requested to conduct a study on the abuses of Act 221, Session Laws of Hawaii 2001, and make recommendations to correct those abuses; and

BE IT FURTHER RESOLVED that the Bureau consider proposed legislation that would limit film productions to "fully digitized computer-generated animation" and requiring fifty per cent of a film to be produced in the State; and

BE IT FURTHER RESOLVED that the Bureau consider suggestions to limit Act 221 tax write-offs to two hundred per cent or two times the Hawaii taxpayer's investment, eliminate investor-controlled reserve accounts, and regulate subsidiaries; and

BE IT FURTHER RESOLVED that the Department of Taxation assist the Bureau with tax data and other information, as needed; and

BE IT FURTHER RESOLVED that certified copies of this Concurrent Resolution be transmitted to Director of the Legislative Reference Bureau and the Director of Taxation.

Report Title:

Act 221, Taxation