Posted on: Friday, June 7, 2002

Construction tax break cannot be limitless

While it may appear obvious that stimulating the local construction industry is good for the economy, the City Council is right to be wary about proposals to extend or expand existing construction tax credits.

Council Budget Committee members this week appeared skeptical about two proposals for new construction tax breaks. At this point, skepticism is more than appropriate.

Some members may have been swayed by emotional testimony from unionized hotel workers, who complained about "corporate welfare" for hotel owners at a time many workers are facing a pay or job squeeze.

But the social justice argument can go both ways. Property owners might argue that the tax breaks are just what it takes to keep hardworking blue-collar construction workers employed and feeding their families.

There is a larger issue, however, that argues for caution. The tax break idea rests on the idea that without it, the proposed new construction or improvement might not ever happen. And in some cases, that might be the case where a project is just short of penciling out so the tax relief pushes it over the line.

It's been argued that some of the recent improvements in Waikiki fall into that category.

But it is difficult to believe that without the property tax break, all construction activity would halt. Much of it will go ahead, tax break or not.

And philosophically, property taxes are supposed to relate directly to the amount of city services required by a home, office building or hotel. When there is more construction, there is a greater demand for city services and thus there should be additional property tax collections to pay for them.

This direct connection between taxes paid and services offered is broken when tax holidays become too pervasive.

One of the measures up for consideration would simply extend an existing commercial property tax exemption for two years beyond next year's deadline. This might make some sense if council members can be convinced that the events of Sept. 11 caused some worthy and qualified projects to be temporarily set back.

The other would extend a new seven-year exemption on the increased value of all new construction in all land-use classifications, including residential. This is too sweeping a proposal, in that the city would face the prospect of seven years in which all construction went forward without the additional property tax base needed to provide essential city services.

That means new construction would get benefits paid by those who already have their home or building and are paying their taxes. That's not equitable.