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The Honolulu Advertiser
Posted on: Sunday, April 28, 2002

ANALYSIS
Legislators favor builders' tax credit over budget cuts

By Kevin Dayton
Advertiser Capitol Bureau Chief

All year, legislators loudly warned they were being forced to impose deep budget cuts that would wound public education and social service programs in Hawai'i.

They were cornered, they said, and the only escape was the politically unpopular move of grabbing money from the hurricane relief fund.

But their actions Friday demonstrated that the truth was more complicated than that. On the last day to push bills out for final votes this week, lawmakers gave preliminary approval to some juicy tax credits for the construction industry.

Those tax credits will cost the state more than $40 million next year, according to an estimate by Gov. Ben Cayetano's administration.

In other words, legislators were not strictly faced with a choice between making deep budget cuts or siphoning $29 million from the hurricane fund. They had at least one other alternative — scrapping the tax breaks for construction industry — and they quietly rejected it.

"This has been my mantra all session," said Lowell Kalapa, president of the Tax Foundation of Hawai'i. "How can you talk about no more money and turn around in the very next second and talk about throwing money out the window in the form of tax credits?"

In fact, at the midpoint of the session when lawmakers were sounding the budget-cutting alarm, the Cayetano administration noted that the Senate was simultaneously proposing an estimated $94 million in tax credits for next year, while the House was proposing about $120 million. Much of the tax credits would have gone for construction projects.

That may come as a surprise to voters who listened to all the shrieking about the terrible budget crisis. Education officials, for example, were warning at various stages of the budget negotiations that the budget cuts might force layoffs of public school teachers or end the popular A-Plus after-school program.

That didn't happen. While the economic slump is certainly making a dent in state tax collections, this week lawmakers plan to adopt a spending plan that would impose no public worker layoffs and increase state general treasury spending next year to about $3.8 billion.

The Legislature intends to accomplish that by raising the tobacco tax and dipping into the state's cash reserve in special funds, the hurricane fund and the so-called "rainy day fund," which gets money from the state's settlement with the tobacco companies.

The construction tax credits were whittled down considerably from the $120 million that the House proposed at midsession, but lawmakers still found tens of millions of dollars to pay for construction tax breaks.

The construction industry and related businesses such as architectural and engineering firms are prime sources of campaign contributions in election season, but lawmakers said they pushed ahead with the construction tax credits because those are the centerpiece of their economic revitalization program.

With tourism struggling in the aftermath of the Sept. 11 attack, both lawmakers and Cayetano wanted to do something to reinforce the building industry, with its thousands of well-paid workers. Cayetano proposed $1 billion in new public works, but lawmakers refused because they said they were worried the state was taking on too much debt.

The tax credits were the lawmakers' alternative. The largest is in Senate Bill 2383, which offers 4 percent tax credits for commercial construction projects.

State Tax Director Marie Okamura testified against that plan, pointing out that developers are planning and launching commercial construction anyway, without the tax credits. Rough estimates are that the credit, which some see as a "bonus" for developers, will cost the state about $23 million next year.

Last year, lawmakers granted hotels and resorts a tax credit for new construction and renovation, and SB 2383 would extend similar tax breaks to other types of commercial construction projects. Among the companies that could potentially benefit is The Honolulu Advertiser, which is planning a printing and distribution center in Kapolei.

Cayetano and the Legislature support extending a separate 4 percent renovation and construction tax credit, established last year, for residential projects. Lawmakers voted to do so Friday night, a step that would cost the state another $18 million next year.

House Speaker Calvin Say said the credits encourage private investment, which makes more sense than using public money for new construction.

"On the tax credit side, we get job opportunities. You're moving things."

State Sen. Cal Kawamoto, who finds that the economy is the most important issue facing lawmakers, said more construction is "going to help."

"I'm pro-construction, so I think the more projects you put out, everybody wins out," said Kawamoto, D-19th (Waipahu, Pearl City). "Like anything else, if you hire local contractors, you hire local people running it, they get money and they're going to buy groceries and buy things for their families. If you keep that revenue flowing, it's going generate income and going to generate taxes."

Lawmakers also approved Senate Bill 2907, a $75 million tax credit to encourage private developers to build an aquarium and marine mammal research facility at Ko Olina. However, that bill does not affect the immediate budget crunch because the tax credit would not be available until 2004.

Lawmakers speculate that Cayetano may veto the Ko Olina and commercial construction tax credits because of the potential cost and for other reasons.

If he does, "then it falls on the governor," said Say, D-18th (Palolo, St. Louis, Kaimuki), because the House speaker believes that the public will realize lawmakers did what they could to invigorate the economy.

Reach Kevin Dayton at kdayton@honoluluadvertiser.com or 525-8070.