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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.
3 thoughts on “The Hawaii Research Activity Tax Credit: Is It Effective and How Can It Be Improved?”
Positive externalities can justify a research credit for Hawaii, but I wonder how much of the externalities go to residents? For example, we would get only a miniscule amount of the consumer gains from a new technology that is nationally applied. Call my view parochial, but I would insist on net benefits to residents before supporting such a measure.
A note on the operation of the tax credit – although the State’s credit is based on the volume of research spending, a claim for the credit can be made only if the taxpayer also claims the federal credit, and a claim for the federal credit requires an increase in research spending.
Re: externalities, sorry but this seems more selfish than parochial. Is this an extension of Nordhaus’ work on the share of gains captured by producers vs. consumers? IIRC, even there the level of private return can be substantial even if the share isn’t, which I think is apparent when considering the shared private/social gains from newsworthy entrepreneurial innovation (think of the level/share of returns to FAANGs, Tesla, Walmart, etc. vs. the massive level/share of returns to consumers). I’m not sure why you would assume that local consumer gains would be miniscule just because an innovation is used outside of the state. Or are you’re thinking of a specific kind of technology maybe?
Thanks for doing this research. In my own bubble I’ve rarely seen evidence that targeted fiscal efforts like credits have been very effective (particularly when considering costs in the way Buchanan emphasized), so it’s nice to see a good HI-centered summary like this showing the contrary.
Can you comment on the data available to analyze these R&D credits, particularly at the firm-level? Any chance those data gathering administrative efforts may be strengthened? Footnotes 21 and 22 seem pretty concerning for any future assessment of the credit’s actual impact. Seems like researchers will be forced to model it out instead.