Honorable Calvin K.Y. Say

Speaker, House of Representatives

Twenty-Second State Legislature

Regular Session of 2003

State of Hawaii

Sir:

Your Committee on Economic Development and Business Concerns, to which was referred H.B. No. 650 entitled:

begs leave to report as follows:

The purpose of this bill is to establish the Small Business Investment and Improvements Tax Credit. Specifically, this bill would allow a small business to claim a 10 percent refundable tax credit for qualifying costs incurred and paid by the eligible taxpayer during the taxable year for qualified investment and improvement expenses.

The Hawaii Technology Trade Association, Subcontractors Association of Hawaii, and Paul Louie & Associates, Inc., submitted testimony in support of this bill.

The Department of Taxation (DOTAX), National Federation of Independent Business, and Tax Foundation of Hawaii submitted comments.

DOTAX expressed several concerns about this bill. For example, in addition to being eligible for the Small Business Investment and Improvements Tax Credit established in this measure, certain taxpayers would also be able to claim multiple tax benefits. These other tax incentives include a business expense or depreciation deduction, technology infrastructure renovation tax credit, and capital goods excise tax credit.

In addition, DOTAX interpreted this measure to allow a small business to first claim the refundable 20 percent state research and development tax credit in section 235-110.91, Hawaii Revised Statutes, for expenses that qualified under section 41 of the Internal Revenue Code (IRC) and also take the 10 percent refundable credit in this bill for "qualified investment and improvement expenses" that did not qualify under section 41 of the Internal Revenue Code (IRC).

DOTAX found that the term "qualified investment and improvement expenses" is not defined in the bill. Moreover, section 41 of the IRC generally does not allow a taxpayer to take a credit for improvements.

Despite these concerns, your Committee finds that this measure still merits further discussion. Your Committee has amended this bill by requiring the Department of Taxation to report yearly to the Legislature on the fiscal impact of the Small Business Investment and Improvements Tax Credit.

As affirmed by the record of votes of the members of your Committee on Economic Development and Business Concerns that is attached to this report, your Committee is in accord with the intent and purpose of H.B. No. 650, as amended herein, and recommends that it pass Second Reading in the form attached hereto as H.B. No. 650, H.D. 1, and be referred to the Committee on Finance.