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The Honolulu Advertiser
Posted on: Monday, December 16, 2002

Tax breaks for telephone company raise questions

By Johnny Brannon and Treena Shapiro
Advertiser Staff Writers

A Honolulu telephone company will enjoy major tax breaks on a new operations center in Central O'ahu, thanks to an unprecedented zoning change that some call an unnecessary giveaway.

After purchasing 163 acres of agricultural land between Wahiawa and Mililani, Sandwich Isles Communications Inc. persuaded the Honolulu City Council and the administrations of Mayor Jeremy Harris and Gov. Ben Cayetano to expand the boundaries of O'ahu's Enterprise Zone tax incentive program.

By including its new land in one of the island's five enterprise zones, Sandwich Isles can take advantage of a variety of tax exemptions and credits meant to draw new businesses to economically depressed areas.

Critics say there was no need to include the land in the zone because Sandwich Isles had already purchased the property and would have built the operations center there anyway. Expanding an enterprise zone to benefit a single property outside the zone's original borders defeats the program's intent, they say.

"When you're just giving away tax incentives to businesses that are coming in anyway, the other businesses and taxpayers have to make up the difference, and that doesn't seem fair to me," said City Councilman Steve Holmes, the council's lone vote in August against expanding the zone.

Other council members, such as Romy Cachola, who sponsored legislation to accommodate the change, argued that it would help an emerging business that will provide an important service and much-needed jobs to the area.

O'ahu enterprise zones have been expanded before to include additional swathes of real estate, but this was the first expansion that benefited a single land owner.

"That's really questionable," said Tax Foundation of Hawai'i president Lowell Kalapa. "Changing the rules in the middle of the game doesn't seem to me to be very accountable."

Sandwich Isles is licensed by the Hawaiian Homes Commission to provide exclusive telecommunications services to all Hawaiian Home Lands, in 69 separate parcels on six islands. When the infrastructure is complete, the company will be free to sell its services to others as well.

Sandwich Isles is unusual in that its venture is to be financed almost entirely by low-interest federal loans from a program meant to ensure good telephone service for rural communities. The company has borrowed about $40 million so far, and plans to borrow $400 million in total.

Al Hee, Sandwich Isles president, said the city's action to include the company's land in the enterprise zone was proper.

"We feel that what we are planning to do meets the intent of the enterprise zone," said Hee, the brother of former Office of Hawaiian Affairs trustee Clayton Hee. "Essentially, what we're trying to do is bring employment into the area."

Al Hee said he did not believe enterprise zones and other programs designed to stimulate the economy were meant only to attract new businesses, but rather any that needed an economic boost.

"I would hope that our legislators and councilmen realize that is it just as difficult for a Hawai'i-based business to survive in Hawai'i as it is for a Mainland-based business or a business based outside of Hawai'i to get established here," he said.

Aside from the area used for the operations center, Hee said the bulk of the property will be used for high-end nurseries for native plants in an attempt to revitalize agriculture. All told, he expects Sandwich Isles to create about 50 permanent jobs, as well as construction work for the facility.

Gil Tam, Sandwich Isles vice president of administration and community affairs, did not know how much the company would save through the rezoning, but noted that the credits include a 100 percent savings in general excise tax for construction and an 80 percent reduction in income tax for the first year. The company plans to invest $50 million in the operations center. Businesses also are eligible for a two-year rebate on city property taxes on the increase in value for new construction.

"The kinds of credit we get are really miniscule compared to what we put into the community and the state," he said. "What's happening is that we'll create jobs. Now you're going to have taxpayers that you otherwise may not have had."

City records show that Sandwich Isles' new operations center will be the hub of its statewide system and employ a staff of 45. The company plans to build a two-story building with 100,000 square feet of floor space. Hee has said that the system is designed primarily to serve Hawaiian Home Lands, but that he would consider leasing lines to other telephone companies.

Sandwich Isles purchased its land last December from Castle and Cooke Inc. for about $7 million. The property is between Kamehameha Highway and the H-2 freeway, near the Mililani National Guard Armory and Wheeler Air Force Base.

The enterprise zone that was expanded includes the Mililani Technology Park and central Wahiawa. It was originally formed in 1996, but only one business is participating in the enterprise program, according to a recent city report.

City enterprise zone coordinator Paul Kobata said that's because retail stores and most other businesses in the zone don't manufacture goods or otherwise add value to products, so they don't qualify.

"Unfortunately, many small businesses aren't able to take advantage of this program," he said.

The city typically conducts a cursory analysis when considering changes to enterprise zones, Kobata said, but no other study was performed to determine how much tax money the city would have received if the Sandwich Isles project had gone forward without the zoning change.