UHERO BRIEFS ARE CIRCULATED TO STIMULATE DISCUSSION AND CRITICAL COMMENT. THE VIEWS EXPRESSED ARE THOSE OF THE INDIVIDUAL AUTHORS. WHILE BRIEFS BENEFIT FROM ACTIVE UHERO DISCUSSION, THEY HAVE NOT UNDERGONE FORMAL ACADEMIC PEER REVIEW.
In 2013, the Hawaii State Legislature enacted a tax credit for Hawaii technology firms engaged in qualified research activities satisfying requirements for the federal research tax credit. After reviewing studies in the economics literature on the effectiveness of research tax credits in other states and countries, we conclude that a research tax credit can be an effective policy instrument to increase R&D spending by Hawaii technology firms. However, in 2018, Hawaii’s research tax credit program operated at a very small scale, with only 20 firms claiming $2.4 million in tax credits. One clear implication of the very small scale of this program is that it cannot substantially contribute to future economic growth. The state limits total annual claims for this credit to $5 million, and we argue that this cap interacts with the firstcome, first-serve rule for rationing credits to discourage technology firms from applying for the credit. We recommend that the annual credit cap be gradually raised to $20 million over a 4-5 year period and that the state consider better coordination and evaluation of its fragmented policies designed to support new and emerging technology firms.