Disappeared News

by Larry Geller

Unless we can bring about necessary structural changes in Hawaii’s economy, we should give up Act 221 tax credits and put the money to better uses.

I’ve written several times why Act 221, a corporate tax credit, won’t work to create a high-tech revolution in Hawaii. Basically it keeps a large number of promotional jobs going in DBEDT and some other organizations and provides a kind of corporate welfare to its recipients. As their names are revealed, we’re seeing just how badly it has worked.

For incentive tax credits to work, they have to be accompanied by structural changes. That is, unless we taxpayers intend to subsidize these private companies forever, when the tax credits are over, there has to be something different about Hawaii that causes high-tech companies to want to stay here. Otherwise, guess what—they’ll be making plans to leave even before the handouts end.

Sure, there is some high-tech here, it would be strange if there were none, but we should not count any program that needs Act 221. If it can only survive with tax credits, we don’t need to have it. We can’t afford it.

Did First Hawaiian Bank really use tax credits to offset operating expenses? It was probably perfectly legal. If that’s what happened, it’s just one more illustration of why the brakes should be put on this program. Hawaii’s banks are among the most profitable in the country, and Act 221 may be responsible for at least a small part of that. The Honolulu Advertiser dove right in to the issue:

Among the businesses benefitting from Act 221 is First Hawaiian Bank, which owns KIC Technology 1 Inc.

KIC Technology received investments eligible for technology tax credits last year.

The bank would not discuss KIC Technology 1, but did provide the following written statement: "The company is engaged in software research and integration with a focus on new and innovative ways to deliver financial services."

First Hawaiian Bank also has two similar subsidiaries participating in the tax credit program — KIC Technology 2 and KIC Technology 3. All three subsidiaries share the same address as First Hawaiian Bank and none of the subsidiaries has its own Web site.

First Hawaiian Bank isn't the only nonhigh-tech company to create what's sometimes referred to as a "drop-down" subsidiary. Insurer AIG Hawaii and graphic company Honblue Inc. have placed a portion of their information technology operations into subsidiaries that qualify for technology tax credits.

Some question whether such a strategy stretches the intent of the program by shifting employees into a subsidiary that provides similar services or sells services primarily to the parent company. That could allow a parent company to get investment tax credits on what otherwise would be operating expenses.

Part of the concern is that these subsidiaries and other businesses based on tax credits won't grow into large, independent businesses before the tax credit program sunsets in 2010. [Honolulu Advertiser, List revealed of firms benefiting from Hawaii's Act 221, 2/1/2009]

I don’t want to re-hash my earlier arguments, but since the tax credit is an issue at the Legislature this session, maybe I can add something.

There are many good reasons (location, location, location are three) why Hawaii will not be the high-tech center of anything, with a few possible exceptions. It is still necessary to bring in parts and talent from elsewhere. Aside from the military, we lack access to customers. Meanwhile, other areas of the world are looking more attractive.

Ok, so we provide tax credits, and it works for some companies. They stay here. Maybe they create jobs in Idaho, though, instead of in Hawaii. There’s nothing we can do about that now. Their management does whatever is necessary to qualify for the tax breaks, they go surfing in the early morning and after work, but create jobs and build their products in factories on the Continent.

One after another company has left Hawaii. It’s a parade of companies that were once the darlings of our high-tech promoters. Each leaving, one after the other, as the siren song of success called them to more suitable locations.

We read that there is a shortage of venture capital here, and that’s certainly true, but what’s good for venture capitalists isn’t necessarily good for Hawaii. They want to turn a profit on their investment. When the time comes for the company to make its move to Silicon Valley or elsewhere, they make sure the company catches the first plane out of here.

I like to use Singapore as an example. As told to me by GE executives when I visited them there, in the 1970s Singapore worked with American companies to transform its economy and its society. It was part of their big plan. The companies knew (were told) that on a certain schedule they would have to move from low-grade, cheap labor-intensive jobs to higher-grade jobs. The educational system would provide those more qualified workers. Singapore would create decent housing for them. That’s what happened. Singapore made sure that the companies knew what the party line was, and the companies knew how they would be making a profit into the future. Tax and other incentives were only a part of the deal.

So what’s Hawaii’s plan? Just tax incentives. Guess what: when they’re over, we’re back where we were.

The papers ran articles recently on Hawaii’s educational system. We’re 49th again in something? Heck, we were 49th before, more or less. High-tech workers want their kids to be educated. Not everyone can be accommodated in private schools. At least, not if we want a booming high-tech industry.

Has our higher education improved? What about the flight of doctors from the islands? Don’t high-tech workers need and expect top-notch medical care?

What about affordable housing. Not everyone in high-tech makes six-figure salaries. We are going nowhere on creating large amounts of affordable housing. Singapore created the CPF flats, some call them the “notorious” CPF (Central Provident Fund) flats, but even those improved with time into much better housing than people had.

What about the plan to tax everyone to death so roads can be widened? Don’t people want to live in a place they can afford? With a recession on us and worse times ahead, our administration can think of nothing better to do than to raise taxes and fees on us. We’re already struggling and it’s going to get worse. Raising taxes does not attract business to the state, high-tech or otherwise.

No, we’re in big trouble, and Act 221 tax credits won’t help us with or without the economic turndown. This morning’s paper said that Hawaii is among the group of states likely to lose the most jobs in 2009. Few people will move here with that uncertainty these days.

So Act 221 should be terminated as soon as possible. If it has been misused, let’s get the money back if we can. Let’s use it to continue health care, retain doctors, and to maintain the safety net.

Our educational system is probably perfect for our primary industry, tourism. Schools often bend to commercial pressure by turning out students who fit the requirements. It doesn’t require a great education to get a typical low-wage job in Hawaii’s tourism trade.

If anyone can figure out how to improve education here, terrific, but we haven’t done that up to now, and I’m not going to hold my breath for improvement any time soon. I’d love to be proven wrong on this, but so far it hasn’t happened. I think I’m safe. But let’s not give up, the kids deserve the best possible education.

If we can succeed in creating affordable housing, better education, and making other social improvements, it will be better for all of us today and better for business tomorrow. We also need alternatives to tourism, though what those might be is another mystery. I don’t think Act 221 or high-tech can be counted on to save us.

Permalink posted by Larry @ 2/09/2009 10:15:00 PM