Report Title:

Capital Investments; State Private Investment Fund

Description:

Authorizes the Hawaii Strategic Development Corporation to transfer tax credits under the State Private Investment Fund. (SB1695 HD2)

THE SENATE

S.B. NO.

1695

TWENTY-THIRD LEGISLATURE, 2005

S.D. 2

STATE OF HAWAII

H.D. 2


 

A BILL FOR AN ACT

 

relating to capital investments.

 

BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

SECTION 1. The legislature finds that Hawaii venture capital is at a crossroads. An analysis published in 2003 by Enterprise Honolulu – A Turning Point in Capital Formation, Assessing Hawaii's Strategic Options – noted that in 2003, Hawaii ranked forty-first in the nation for venture capital activity as a percentage of gross state product. The report also stated that nearly sixty per cent of Hawaii's small and growth businesses anticipated a sales increase in 2003, requiring capital investments in order to meet full potential.

Despite limited access to capital, a small group of world-class entrepreneurs has emerged from Hawaii, poised for the next stage of growth and potential exit strategies for its investors. Unless addressed, the funding gap in later-stage financing may undermine this growth, slow the returns of pioneering local venture capitalists, and force local entrepreneurs to relocate to other jurisdictions. Projected venture capital demands for the five-year period from 2003-2008 are estimated as $95,000,000 needed from Hawaii and $138,000,000 needed from the United States mainland and international sources.

The legislature responded with Act 215, Session Laws of Hawaii 2004, which provides significant advances in capital formation for Hawaii's emerging technology firms and expansion-oriented companies by providing contingent tax credits to be used by the Hawaii strategic development corporation (corporation) to secure loans undertaken by the corporation to invest in venture capital funds. Although the Act was a significant first step in establishing the state private investment fund, no funds were appropriated in 2004.

The purpose of this Act is:

(1) To authorize the issuance of the credits in an unspecified amount to the corporation and to authorize the corporation to extend guarantees and incur debt;

(2) To authorize the corporation to transfer the credits as needed; and

(3) To include insurance premium taxes in the list of taxes for which tax credits may be provided under this Act.

SECTION 2. Section 211G-1, Hawaii Revised Statutes, is amended by amending the definitions of "tax credits" and "taxpayer" to read as follows:

""Tax credits" means tax credits issued or transferred pursuant to this chapter and available against liabilities imposed by chapter 235 [or], 241[.], or 431.

"Taxpayer" means a person subject to a tax imposed by chapter 235 [or], 241[.], or 431."

SECTION 3. Section 211G-12, Hawaii Revised Statutes, is amended as follows:

1. By amending subsections (a), (b), and (c) to read:

"(a) The State shall issue tax credits to the corporation that may be transferred or otherwise used to reduce the tax liability of any taxpayer pursuant to chapter 235 [or], 241[.], or 431. The total amount of tax credits that may be issued, and which may be transferred pursuant to this chapter by the corporation is [$36,000,000.] $ . Upon compliance with subsection (b), the credits shall be freely transferable by the corporation to transferees and by transferees to subsequent transferees; however, the tax credits so transferred by the corporation shall not be exercisable before July 1, 2005, nor after July 1, 2030. The corporation shall not transfer tax credits except in conjunction with a legitimate call on a corporation guarantee. The corporation shall immediately notify the president of the senate, the speaker of the house of representatives, and the governor in writing if any tax credit is transferred by the corporation in conjunction with a legitimate call on a corporation guarantee; provided that the corporation shall not be required to make that notification for transfers to subsequent transferees.

(b) Subject to the [annual] authorization by the legislature, the corporation may transfer tax credits under this section up to the annual amount allowed under subsection (c). Legislative authorization for the tax credits shall be by a separate legislative act.

(c) The corporation shall determine the amount of individual tax credits to be transferred pursuant to this chapter and may negotiate for the sale of those credits subject only to the limits imposed by this chapter. The corporation shall limit the transfer of tax credits that may be claimed and used to reduce the tax otherwise imposed by chapter 235 [or], 241, or 431, for one fiscal year (including any tax credits that are carried over by a taxpayer from a prior fiscal year and used to reduce taxes otherwise imposed in the current fiscal year, as permitted in subsection (g)) to not more than an aggregate total of [$12,000,000] $20,000,000 per fiscal year. The board shall clearly indicate on the face of the certificate or other document transferring the tax credit the principal amount of the tax credit and the taxable year or years for which the credit may be claimed."

2. By amending subsections (f) and (g) to read:

"(f) The tax credits issued or transferred pursuant to this chapter, upon election by the taxpayer at time of use, shall be treated as a payment or prepayment in lieu of taxes imposed under chapter 235 [or], 241[.], or 431. Tax credits used pursuant to this chapter shall be claimed as a payment of tax or estimated tax for the purposes of chapter 235 [or], 241[.], or 431.

(g) If the tax credits under this section exceed the taxpayer's income tax liability under chapter 235 [or], 241, or 431 for any taxable year, or for any other reason [is] are not claimed by a taxpayer in whole or in part in any taxable year, the excess of the tax credit over liability, or the amount of the unclaimed tax credit, as the case may be, may be carried over and used as a credit against the taxpayer's income tax liability in any subsequent year until exhausted, subject to:

(1) The deadline for the exercise of tax credits imposed by subsection (a); and

(2) The monetary limit imposed by subsection (c)."

SECTION 4. The corporation is issued tax credits in the amount of $ and is authorized to freely transfer those credits pursuant to section 211G-12, Hawaii Revised Statutes, to carry out the provisions of chapter 211G, Hawaii Revised Statutes.

SECTION 5. The corporation is authorized to extend financial guarantees pursuant to section 211G-13, Hawaii Revised Statutes. As a condition precedent to its extension of each financial guarantee, the corporation shall establish and maintain a reasonable reserve with respect to its contingent liability as a guarantor. Such reasonable reserve shall be established and maintained for the duration of each financial guarantee.

SECTION 6. The corporation is authorized to incur indebtedness in the amount of $ , or whatsoever amount of credits is issued to the corporation pursuant to section 211G-14, Hawaii Revised Statutes, to carry out the provisions of chapter 211G, Hawaii Revised Statutes.

SECTION 7. There is appropriated out of the capital formation revolving fund the sum of $ or so much thereof as may be necessary for fiscal year 2005-2006 to be expended by the Hawaii strategic development corporation in carrying out the purposes of chapter 211G, Hawaii Revised Statutes.

SECTION 8. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 9. This Act shall take effect on July 1, 2099.