Building tax credit set for 1-year extension

By Johnny Brannon
Advertiser Staff Writer

There is little direct evidence that a housing construction tax credit program that the state created to help boost the economy after Sept. 11 has had much impact, but Gov. Ben Cayetano said he believes it has been effective and will approve a one-year extension.

The program, first approved by lawmakers during the special legislative session Cayetano called after Sept. 11, allows homeowners and housing developers to claim a 4 percent income tax credit on new construction and remodeling work costing up to $250,000 per unit.

About 4,000 tax credit claims totaling roughly $4 million have been filed so far, and another $4 million or so in claims are likely among those awaiting processing, according to state Department of Taxation researchers. That's far less than the $18 million a year the department had estimated the program would cost.

O'ahu's real estate market is heating up fast and home prices rose last month to their highest level in more than six years, leading some to question whether the tax credits are necessary.

"The demand is there anyway," said Lowell Kalapa, Tax Foundation of Hawai'i president. "We didn't like the bill to begin with, because it just skews the market."

He also said it made little sense for the Legislature to extend the benefit retroactively to December 2000 — well before the terrorist attacks and the economic slump that followed.

But Cayetano said he is confident the tax credits have helped strengthen the economy and housing market, and should continue, at least for now.

The Legislature in April approved an extension of the program until July 2003, and the governor indicated he will soon sign the bill into law; advocates of the program had pushed for an extension to 2005, but lawmakers said that was too large a commitment.

"The housing market is one of the strong parts of our economy, and I think it's a good thing to give homeowners a break," Cayetano said. "By doing that ... you continue to encourage construction of things that are important, and residential units are important to us, so I can continue to support that."

The credits can be claimed for new construction or renovation, but not for improvements that aren't part of a dwelling, such as swimming pools and landscaping.

Cayetano first backed the residential construction tax credits after lawmakers began considering a tax-credit program for hotel construction and renovation during the special session. Extending such benefits to homeowners made the approach more equitable, he said. But when the economy has fully recovered, the state should probably back away from tax credits and instead reduce the personal income tax, he said.

Others say the tax credit certainly hasn't slowed construction or hurt the housing market, but that it has not been a huge boost, either.

"It's effect has been pretty limited," said John Morita, government relations director for the Building Industry Association, which represents contractors, developers, architects and others in the real estate business and had backed the program. "I think a lot of people were skeptical about using it."

But that may change as more people become aware that tax credits are available and the state shows a proven track record of processing claims, he said.

"A lot of our member contractors are trying to make their customers aware of it because it's a price reduction," Morita said. "They can get a little more work done or bring their dream home a little closer. Home purchases or home improvements are such a large expense, every little bit helps."

Guy Tamashiro, chairman of the Honolulu Board of Realtors, said the tax credit program is not a hot topic in real estate circles. "People don't talk about it like it's a big deal, and it seems like a lot of people don't know about it. It's not really known out there that much."

He said the tax credits will not harm the housing market, but that home prices have risen because of low interest rates, high demand, and limited inventory.

Cayetano reiterated that he will veto a similar 4 percent tax credit program for commercial construction projects, which he has said is not necessary. Officials estimated that program would cost the state $30 million a year in lost revenue.

The governor said he is still considering a bill that would provide up to $75 million in tax credits to developers who want to build an aquarium and marine mammal research center at Ko Olina.

Reach Johnny Brannon at jbrannon@honoluluadvertiser.com or 525-8070.