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The Honolulu Advertiser
Posted on: Wednesday, July 3, 2002

COMMENTARY
Here's why the Ko Olina bill was vetoed

By Gov. Ben Cayetano

My veto of the "Ko Olina bill" disappointed legislators, Ko Olina landowners and unions.

"Let's read the fine print and make sure the people get a fair shake. They deserve at least that from their public servants," says Gov. Ben Cayetano.

Advertiser library photo

The bill was intended to stimulate employment through tax credits equal to the cost of constructing attractions and educational facilities, including a world-class aquarium and marine science and mammal facility, at the Ko Olina Resort and Marina. The tax credit is a non-refundable, carry-forward tax credit, up to $75 million.

My administration is no stranger to using tax breaks to stimulate economic growth. Since 1996, the state enacted a six-year, $2 billion tax cut, one of the biggest tax cuts of its kind in the nation. Other tax breaks such as Act 221, Hawai'i's generous high-tech/biotech investment law, followed.

Last year, I approved the homeowner's tax credit, which provides up to a $10,000 tax credit for new-home purchase or renovation. And the hotel construction and renovation tax credit was increased from 4 percent to 10 percent.

These tax breaks have helped Hawai'i's economy withstand the economic impact of Sept. 11 better than most expected. Today, Hawai'i's unemployment rate is 4.4 percent compared to 6 percent for the nation. Construction, home sales and auto sales remain strong. Domestic tourism now exceeds pre-Sept. 11 numbers.

At the same time, however, the tax breaks reduced state tax revenues. A few months ago, the Legislature struggled as it cut or reduced state programs and services to balance the state budget.

Tax incentives should be used strategically: to attract new investment, create new industries, or to grow and improve targeted, existing ones.

The Ko Olina bill seems innovative. But read the fine print and it falls short. It raises more questions than it answers, does little to ensure that the public is getting a fair shake and has loopholes that may cost Hawai'i's taxpayers far more than $75 million.

The bill represents a disturbing new trend: It specifies tax benefits for an exclusive group involved in a specific project. To be sure, the state has wooed specific businesses before. However, these laws were applied across the board to fairly allow other businesses to enjoy the same tax benefits for similar investments.

Proponents give the impression that without the $75 million, there would be no development at Ko Olina. If this were true, I may not have vetoed the bill. Nothing, however, could be further from the truth.

Prior to Sept. 11, the Ko Olina developers announced a number of projects. Some of these projects are in various phases of construction: Marriot's 750-villa time-share project; Brookfield Homes 270-unit Coconut Plantation; Armstrong Builders' joint partnership with A&B Properties to build 116 town homes is already under construction.

A few weeks after Sept. 11, I was assured by Ko Olina's chief spokesman, Jeff Stone, that the projects would move ahead as scheduled.

During the special session in October, 2001, Stone and others lobbied the Legislature to increase the existing hotel tax credit from 4 percent to 10 percent. The Legislature did, and I approved it.

With the ink of my signature hardly dry on the 10 percent hotel tax credit bill, Stone and his Ko Olina advocates proposed their $75 million tax credit bill, which the Legislature approved.

After I vetoed the bill, Sen. Colleen Hanabusa expressed her disappointment, stating "You're not going to come up with this combination again ..." But why not? If the idea is a good one today, why will it not be a good one a year from now, when the Legislature can really analyze the bill and fine-tune it to assure the public a fair shake?

They can start by eliminating the bill's loopholes. The bill creates a new "super" tax credit. Traditionally, tax credits have been used to offset income taxes. Under this bill, the taxpayers could use the credit to also offset other taxes (i.e., use, public service company, insurance premium, financial institutions, general excise and transient accommodations) to avoid any tax liability.

Because the aquarium and other marine facilities qualify as ocean marine projects, the developers may be eligible for generous tax breaks under Act 221. If so, this loophole will cost taxpayers far more than $75 million. Close it.

Clear up the vague language. Define "world-class aquarium" "attractions" as used in the definition of "qualified costs."

And set a clear deadline for when the developers must complete the construction of the aquarium. The bill proposes giving the state one-half of the aquarium's net income after 17 years. But if the developers take 10 years to complete the aquarium, for example, it would take 27 years — not 17 — before the state receive its share of the net income. Fix it.

Most important, keep this development in proper perspective. The landowners did not buy their properties just to allow it to lie idle. They bought it to develop and build profitable projects. The longer they wait, the greater the cost. Timing is the key to successful developments.

Today, interest rates are at an all-time low. Combined with the current 10 percent hotel tax credit and the $10,000 new-homeowner tax credit, it makes sense for Stone and his Ko Olina colleagues to build.

The state has done much to help Hawai'i's tourism industry over the past eight years. The state built a $350 million Convention Center, established the Hawai'i Tourism Authority, gave it $61 million a year to market Hawai'i, saved millions for the airlines by twice waiving their landing fees, and provided the construction industry and developers with some of the most generous tax breaks in the nation to build or renovate hotels, resorts and housing projects.

We all want to create jobs, but before jumping to approve proposals like the Ko Olina bill, let's read the fine print and make sure the people get a fair shake. They deserve at least that from their public servants.