SB 3213: Tax Credit; Research Activities

A BILL FOR AN ACT

RELATING TO TAX CREDIT FOR RESEARCH ACTIVITIES.

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

     SECTION 1.  The legislature finds that Hawaii must diversify its economy by encouraging and promoting research and development activities.  These efforts will help attract and retain technology companies in the State and provide high-paying jobs that are necessary for residents to thrive in Hawaii.

     The legislature further finds that Hawaii has an opportunity to create careers that allow its young people to build their futures at home.  When local graduates can find work that matches their education and ambition, they are more likely to remain in the State, raise families, start businesses, and strengthen the communities that raised them.  Research and development jobs offer these meaningful careers rooted in imagination and skill.

     The legislature also finds that while tourism remains vital to Hawaii's economy, the State can and should build additional engines of growth.  An economy grounded in research and innovation creates value from ideas – drawing on the creativity, education, and talent of its people.  This approach increases economic resilience by ensuring that when one sector faces disruption, as tourism did during the COVID-19 pandemic and following the Lahaina wildfire, other industries can help sustain families and communities.

     The legislature additionally finds that economic research supports this approach.  The 2018 Nobel Prize in Economic Sciences was awarded for research demonstrating that sustained economic growth comes from investing in people and ideas.  The 2025 Nobel Prize in Economic Sciences further showed how innovation drives long-term growth by creating new technologies, products, and production methods that replace old ones.  Economies that support research and development grow from within, generating prosperity that compounds over generations.

     The legislature further finds that Hawaii's research activities tax credit has proven its value, as demand consistently exceeds available funding.  For the past three years, the $5,000,000 annual cap has been reached almost immediately upon opening applications, demonstrating strong interest from companies ready to invest in Hawaii.  Additionally, removing the federal base-amount calculation will encourage companies to expand their research activities year after year without being penalized for prior investments and eliminates the uncertainty for businesses planning multi-year research investments in Hawaii.

     The legislature also finds that strengthening this credit will position Hawaii to compete more effectively for innovation-driven companies.  Other states like Florida, Maryland, and Michigan have made significant commitments to research incentives, with annual caps ranging from $9,000,000 to $100,000,000.  Increasing Hawaii's cap and simplifying the credit will send a clear signal that the State believes in its people and invests in their potential.

     The purpose of this Act is to strengthen the research activities tax credit and invest in Hawaii's future by:

     (1)  Allowing taxpayers to claim credits for all qualified research expenses without reduction for prior-year spending; and

     (2)  Increasing the annual statewide cap from $5,000,000 to $15,000,000 to meet demonstrated demand and support an economy in which Hawaii's families can thrive.

     SECTION 2.  Section 235-110.91, Hawaii Revised Statutes, is amended as follows:

     1.  By amending subsection (b) to read:

     "(b)  All references to Internal Revenue Code sections within sections 41 and 280C(c) of the Internal Revenue Code shall be operative for purposes of this section[.]; provided that references to the base amount in section 41 of the Internal Revenue Code shall not apply, and a credit for all qualified research expenses may be taken without regard to the amount of expenses for previous years."

     2.  By amending subsection (f) to read:

     "(f)  If in any taxable year the annual amount of certified credits reaches [$5,000,000] $15,000,000 in the aggregate, the department of business, economic development, and tourism shall immediately discontinue certifying credits and notify the department of taxation.  In no instance shall the department of business, economic development, and tourism certify a total amount of credits exceeding [$5,000,000] $15,000,000 per taxable year.  To comply with this restriction, the department of business, economic development, and tourism shall certify credits on a [first come, first served] first-come, first-served basis.

     The department of taxation shall not allow the aggregate amount of credits claimed to exceed that amount per taxable year."

     SECTION 3.  Statutory material to be repealed is bracketed and stricken.  New statutory material is underscored.

     SECTION 4.  This Act, upon its approval, shall apply to taxable years beginning after December 31, 2025.

Report Title:

Tax Credit; Research Activities

Description:

Restores the provision that makes references to the Internal Revenue Code's base-amount requirement inapplicable to the Research Activities Tax Credit, allowing all qualified research expenses to be claimed without regard to prior-year expenses.  Increases the annual cap for the Research Activities Tax Credit.

The summary description of legislation appearing on this page is for informational purposes only and is not legislation or evidence of legislative intent.