Saturday, October 07, 2006


Disappeared taxes: Giveaway for high-tech is probably a huge waste of our money, but who knows?

Government needs to be accountable to the people. It would be hard to find anyone who would disagree with that. Yet Hawaii's state government is handing out huge bundles of cash--money which is badly needed for other purposes--and remains totally unaccountable so far. This needs to be changed. Any of us can think of better uses for this money. I'll give some suggestions at the end of this article, although anyone could come up with a similar list.

It's not as though we don't know about what's going on. The question of whether the so-called "high-tech" tax credit (Act 221/Act 215) is working has been well covered, for example in today's Star-Bulletin article No way to tell if tax credit is doing its job, consultants say. The Advertiser makes a stronger negative evaluation: Isles' tech jobs drop despite tax credit. Well, gosh, if the consultants can't tell, with better access to information than you or I have, then one thing is clear: accountability for this huge spending black hole (so far $185 million and counting) is woefully absent. And look, we're not getting the jobs we were promised, either. From the Advertiser article:
"It does seem that the total number of (technology) jobs has gone down and the relative share of technology jobs has gone down," said University of West Georgia professor Bruce Bird, the report's co-author.
For this amount of money a large number of people should be employed, but that doesn't seem to be the case.

No way to trace the money? Yikes!

If the money was spent by the government, or even if someone stole or embezzled it, we'd know where it went, but the beneficiaries of this corporate welfare remain shrouded from public view.
We also can't tell if they are "paying back" legislators or the administration with campaign contributions or in other ways, because we don't know who they are. That this tax incentive can create a "pay for play" racket should be self-evident.

Tax credits, in the absence of individualized long-term plans, don't work

While the newspapers reveal the extent of the damage, they don't explain how we can go about discovering the information we need in order to decide whether even more money should be dumped in this hole.

Why am I so negative about this program? It's because I am aware of how programs have worked successfully elsewhere. Other programs are not simply giveaways to companies in the hopes that they will stay local and so create jobs and tax revenues, or even attract further tech businesses to join them. There is much more that has to be established before tax incentives are paid out, unless we just want to waste our money (as we are probably doing at present, but who can know? Even the consultants couldn't say).

Any program needs to be measured and refined, not only for public accountability, but to adjust it if necessary and to test if its objectives are being met.

From the Star-Bulletin story:
Under Acts 221/215, Hawaii grants 100 percent tax credits for investments in qualified high-tech companies, which include things like firms that make computer software and alternative energy fuels, as well as performing arts productions, such as movies and television shows. The credits are paid out over five years.
The inclusion of performing arts productions is problematic in itself: there should be a seperate "performing arts" tax credit so that it can be measured properly and evaluated. Performing arts and high-tech are being lumped together for some reason and should be separated.

Computer software is a commodity business. Software is certainly an industry in itself, and it is also part of almost any other business. Software is incorporated into business systems, banking, manufacturing, and so on. Giving tax credits for that is silly. A bank that needs a few programmers either just hires them or contracts out. Tax incentives are not needed because software creation is part of their business.

The credits are presumably intended to encourage software development as a standalone industry. The problem is that it's unlikely that very much of a software industry would migrate to a little island in middle of the Pacific, far from a customer base, where the educational system is lacking and cost of living is high. Of course there would be some software firms here, just as there are elsewhere.

Even as DBEDT was beginning to pump money into software in the late 1980s, the industry had begun to flee the Mainland for low-wage, low-cost locations such as Ireland. At this point, having established itself in India, we see the beginning of outsourcing from India to Bangladesh.

By its nature, a software development industry is highly volatile. You can't nail it down very easily in isolation. Due to the ubiquity of the Internet, it can migrate to places where the workforce is educated and salaries are low, compared to anywhere in this country.

Or it will move to where its customers are, so that (for example) they can get together after work over drinks and talk business. So even if a firm sets up in Hawaii because of the tax credits (or because the CEO likes to surf, or because someone believed the hype that Hawaii is going to be a "high-tech center of the Pacific," or that being between the time zones is an advantage of some sort), sooner or later the company bean counter comes knocking and reality sets in: move to Silicon Valley or you're fired. Or to Wall Street, or to Hollywood. Wherever, but not here.

What does work is to create plans for the lifetime of an industry. Singapore is arguably the best example of a centrally planned economy in the world, and that's one thing they did consistently. In the 1970s Singapore began attracting manufacturing, low-tech and later high-tech manufacturing, in earnest. When General Electric established itself in Singapore, one reason was tax incentives. But Singapore planners knew that if that was all they offered, GE would simply pack up and move in the future to another location where the total environment was better. Planners got together with GE and with other companies to assure them of their long-term success in the country. For example, Singapore was going to upgrade the education of its workers, and this would mean paying higher wages in the future, but for increased productivity. Singapore planned to upgrade its ports and strengthen its financial institutions. It could tell companies that the medium- and low-tech industries that support high-tech manufacturing would be available to them as suppliers. All this was up-front, so CEOs could make plans to stay.

Companies knew what to expect, and what benefits they would gain over time. If they were going to leave in the future, they (and the Singapore government) probably understood the mutual benefits that would accrue in the meantime. This isn't rocket science, the factors that lead to business success are most often calculable and largely predictable, even in the face of unexpected changes in manufacturing or technology.

Singapore will thrive because of its planning.

If all Hawaii offers is tax incentives, it's unlikely that corporations will stay. Of course, they'll stay as long as we taxpayers offer them a handout. Who wouldn't? Turn off the money spigot, and what will keep them here? This question has to be answered for each and every company, or they should not receive the tax incentive in the first place.

DBEDT has a history of spotlighting new high-tech companies at the beginning of their life cycle. The latest wunderkind is splashed across the daily papers. Down the road the bean counters do come knocking, and the company leaves, or their stock sags. One after another. Recall all the hype around that real-estate project dubbed the "Mililani High-Tech Park." The bean-counter knock came for one star tenant after another.

Suggestions: Get real, start planning, become accountable

There are certainly areas of technology where Hawaii's unique location, climate or other factors would enable some kind of high-tech to flourish. There are plenty of examples today, although none yet can sustain an island economy. Biotech, for example, comes to mind. But not the building of electric cars (this is not Detroit, and even there, auto companies are now laying off workers). We should use electric cars, but it's not clear why we would succeed in building and marketing them.

What are some of the things we can do with those millions in corporate welfare currently passed out under the table? Your suggestions are probably as good as mine.

1) We the people should get together and pool our suggestions. Then vote for those who will support them. I doubt very many of us want to continue to pay out secret tax incentives to just any corporation.

2) Some of the tax largess could be spent instead in developing quality charter magnet schools. New York City has three tech schools: Bronx Science, Stuyvesant, and Brooklyn Tech. I graduated from Stuyvesant. The alumni of these schools include many technology leaders.

Our poor educational system is often cited as one reason why high-tech companies won't consider setting up here. Employees want their children to succeed too! So let's fix it.

And I don't suggest giving the money to the DOE to develop these schools. Find and hire educators who know how to make it work. Quit starving our existing charter schools also. Help them to do better.

3) We can put in free city-wide high-speed data networks to enhance our appeal to tech businesses, but we should do that anyway because our own existing businesses are being hampered if they don't have access to infrastructure that other Mainland cities now offer. In other words, we should first be users or consumers of high-tech to better our economy without worrying about being the center of anything or a "hub of the Pacific."

This country has fallen way behind others in speed of broadband data, cost of access, and availability to individuals and companies. We pay far more and get far less, and many of us can't get speedy broadband access at all. So how can we compete? Hawaii is behind other areas in some important measures. We can spend some money and fix it.

4) Chives and parsley thrive on my lanai. There's not enough sun to grow other things that I'd like, or my soil doesn't have the right pH, or something. So for the moment, my plan is to grow chives and parsley and figure out what else might prosper in my pots or what else likes the conditions I have.

We need to figure out what kind of industries and which companies can succeed in Hawaii. Do the math for each of them or with the officers of some target corporations. If they need access to the university, plan where they can set up nearby (no use waiting for Mufi to lay train tracks to UH, he doesn't see the connection between transit and economic development). Or gosh, put in the tracks if that's what it takes. One mayor may be confounding state-wide prosperity with small thinking. But have a sound reason for what is done. If the numbers don't look like they can make a profit long-term, forget about bringing them here or starting that kind of a business. Tax credits which run out eventually won't help unless the overall equation comes up profitable for the target business. Even then, will they be more profitable elsewhere? If so, they won't stay for that reason.

5) With the 12 1/2% increase in excise tax set for 2007, any company, high-tech or not, will think twice about doing any business here. Not only will direct costs go up, but the cost of living can be expected to ratchet up. Housing will be even more difficult to find or afford. In order to keep the labor force fed and housed, salaries will increase, further bumping up costs for goods and services produced here. You know, and companies know, that costs here are going up, not down.

The question of ballooning costs must be addressed. It simply must. Or just be happy with tourism and its risks.

6) Learn to plan successfully. The current fiasco in transportation planning simply demonstrates to outside observers that we don't know the first thing about planning. Does cutting off a train line on both ends demonstrate foresight and perspicuity?

7) For goodness sake, drop the hype, get real, become accountable, stop the payout of tax money without evidence that companies will stay and create long-term, well-paying jobs. Just say no to secret tax payouts. Demonstrate responsibility in government.

CEOs know that the tax incentives are not part of a long-term plan for their company, so they don't make long-term plans to stay.

It took Guy Kawasaki to point out (in one of his talks at UH) that the time-zone advantage long hyped by DBEDT was junk, and that there is a world of difference between Hawaii and Silicon Valley. His talk should have inspired our economic planners to try something different. We need to recognize that there are a number of businesses making a good living promoting high tech, and either get some results, or set them a different task. Promoting high-tech should not itself be allowed to become a black hole into which we just throw taxpayer money.

We need to get real, and to make realistic, achievable plans. Paying out secret tax incentives makes no contribution to our long-term success nor enhances our government's reputation as competent economic planners.


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