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Spin Zone

Where Hawaii’s Leaders Face Off

Have high-tech tax credits helped or hurt Hawaii?

WALTER R. ROTH
managing director
Channel Capital LLC

A: Act 221 changed how Hawaii’s high-tech companies get funded. Instead of undergoing a rigorous vetting process, startup companies are now mostly packaged as tax shelters. Elements of risk can be eliminated from the financing equation if a company can simply be kept alive long enough for an investor to receive his annual tax credits.

This attracts investors who can profit even if the business fails. As directors, such tax-conscious investors obstruct anything that might jeopardize their tax breaks.
Local investors who would have otherwise invested in startups based on the traditional risk/reward model were instead drawn to highly promoted opportunities that were based on the “risk free” Act 221 tax model.

Hawaii’s most experienced entrepreneurs predicted that Acts 221 would make it virtually impossible for a Hawaii company to secure follow-on rounds of growth capital from Mainland venture capital firms. Such investors are skeptical of businesses that have never been properly vetted, and recoil in horror at the thought of partnering with existing investors who are fixated on not losing the credits.

Experienced entrepreneurs also correctly predicted that there would be large-scale abuse.

Act 221 was conceived by lawyers and accountants who have made millions by packaging and promoting these tax-shelter “investments.” Rather than engage in fair and open debate over the merits of their approach, the tax-credit proponents demonized anyone who voiced concern. The targeted individuals included successful entrepreneurs and venture capitalists who have been incredibly generous in sharing their time, experience and networks to help Hawaii’s budding entrepreneurs build high-tech companies. It is both ironic and tragic that these gifts have so often been greeted with abuse, all because they spoke earnestly about the “free money” provided by Act 221.

Meanwhile, the high-tech industry in Hawaii continues to struggle and Hawaii taxpayers are picking up the tab.

 

BILL SPENCER
President
Hawaii Venture Capital Association

A: To me, the answer is obvious: Act 221 has absolutely helped Hawaii, but not as much as it could have, had we not been having this pointless debate. Don’t we know that moving to a tech economy is critical for Hawaii? Don’t we know we have to provide incentives and take risks to do that? Knocking Act 221 is a huge and terribly destructive mistake for our future.

Look at the numbers released by the tax department. They’re great. The amounts Act 221 companies put into the economy were 127 percent more than the value of the credits. Even on a short-term cash basis, Hawaii has already made more than the incentives cost.

On a long-term basis, Act 221 has introduced Hawaii investors to investing in innovative tech companies rather than conventional real estate. Beyond that, Act 221 has given hundreds of our entrepreneurs a chance to grow great companies and create the kind of quality jobs that encourage our best and brightest to stay in Hawaii. What is that worth?

I am sad for those who continue to detract and debate when it would be so much better for everyone to focus on building a viable economic future.

Act 221 credits are a great way to do that and they cost less than one-half of 1 percent of the State budget. Act 221 should be renewed without hesitation or sunset. In fact, we must do more to help our entrepreneurs build great companies here.

We all need to support Act 221. Those who have been detractors (including the media who always seem to inflame this debate), need to step out of the way and give Act 221 a chance to work. We need to show our entrepreneurs and their investors that we care about them, and we’re willing to take a chance on them.

 

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Hawaii Business,December