Candidates have few new ideas on economy
By Lynda Arakawa and Kevin Dayton
Advertiser Capitol Bureau
The three Democratic candidates for governor are advancing strikingly similar proposals to repair Hawai'i's economy — essentially variations on ideas that have been circulating for years: diversify the economy and use tax incentives to create jobs and attract new business.
But with experts in disagreement on whether tax incentives work, and few realistic options for shifting even a sliver of the state's 200,000 tourism workers into other businesses, the plans detailed by the Democrats and Republican Linda Lingle have many economists and businesspeople unimpressed.
Gov. Ben Cayetano is dismissive even of the Democrats' ideas, and said none of the candidates has explained specifically how he or she plans to meet the state's economic challenges.
"A lot of this stuff is very, very general," the governor said. "I don't see anything that really kind of jumps out of the woodwork."
Democrats Mazie Hirono, Ed Case, and D.G. "Andy" Anderson all oppose raising taxes, preferring instead tax incentives to support and attract businesses in fields such as high technology.
But economic experts say they have seen no confirmation that tax incentives are boosting Hawai'i's economy, or that more would help.
University of Hawai'i economics professor James Mak said tax incentives have become popular politically "because people have run out of options."
"You always hear about this anecdotal evidence about individual cases where things like that work," he said. "Overall, though, I think the evidence is not strong."
Mak noted that tax credits and other incentives cause at least a short-term loss in state tax revenues, and questioned whether candidates have thought about how to handle that and whether the cost would be worth it. None has addressed the question.
"You need to perform some cost-benefit analysis," Mak said. "They're quite ready to sort of handpick the areas they're willing to put their money in — or taxpayers' money in — without an indication of what the tradeoff to us will be."
Lowell Kalapa, president of the Tax Foundation of Hawai'i, said the focus on tax incentives appears to be an effort to find a simple, "sexy" idea that voters can grasp. But he believes a more complicated, multi-faceted approach is needed to refresh and diversify the economy.
"Maybe that's how a political campaign takes place," Kalapa said. "You espouse ideas that appeal to the uninformed voter and you don't have to worry about the details. Well, if they've got a plan, then show it, because I think people need to have some sort of comfort level with what they're saying.
"To me, all three of them, most of it is political rhetoric."
High-tech businesses may indeed be the most likely sources of economic diversification and growth, but they also are likely to be drawn by resources such as a skilled work force, Kalapa said.
"If the conditions aren't right, and the investment doesn't look like it's going to pencil out, they're not going to build."
Cayetano noted that in recent years the state already has reduced income taxes, taken some bite out of the general excise tax and offered tax incentives for high technology and other activities. With the erosion of the local economy in the last year, he said, the tax incentives and cuts are straining the state budget.
"I think right now we need to sit back and kind of take a look at the impact that all of the tax breaks that we've given has had," Cayetano said. "Generally speaking,
I don't think that we should be giving any more tax breaks."
Economists also are skeptical of proposals by Hirono and Case to create a high-profile team to suggest ways to improve the economy.
Hirono is calling her group an economic expansion council; Case's is an emergency public-private team. Both envision representation by government, business, labor and others. And both resemble the Economic Revitalization Task Force convened by Cayetano in 1997.
"What are they going to get out of these new groups ... that they couldn't get out of the recommendations of the governor's task force?" Mak said. "Are the task force recommendations so obsolete in a matter of a couple of years that they think that more is needed?"
Case has said his team would include more people from different backgrounds than did Cayetano's, but Mak suggested that expanding the group would dilute its focus on the economy.
"It's kind of an easy escape to talk about forming some council," Cayetano said. "It's OK if you talk about forming a council and getting input, but the voters are entitled to specific ideas and a specific strategy."
Kalapa said various study groups already had offered specific ideas that had died in the the Legislature — such as eliminating the corporate income tax. That proposal, rejected repeatedly by the Legislature, would benefit existing businesses and any new ones, Kalapa said, while signaling that the state is serious about improving the business climate.
Lawrence Boyd, labor economist at the Center for Labor Education and Research at the University of Hawai'iiWest O'ahu, said all three Democrats seem to grasp the connection between public education and economic development, which often was absent in past campaigns.
"I think that's actually a step forward," Boyd said. "If you have a good infrastructure in terms of lower and higher education, then generally states tend to have good outcomes" in terms of the economy.
Boyd noted that Hawai'i's per capita spending on education — excluding special education — lags behind other states. He said the candidates should explain, as part of their economic prescriptions, what they intend to do about spending on education.
"People have to address this. They can't just say that if you change the chairs around in this situation, then we'll see improvements," Boyd said.
He believes the incoming governor will face an economic crisis on a par with Sept. 11, when Hawai'i's economy all but shut down in the wake of the terrorist attacks. The impact from a war with Iraq and a possible "double-dip" recession on the Mainland could be enormous, Boyd said.
"I don't believe they're going to be dealt an easy hand to play."
Here are some ideas Democrats propose to revitalize Hawai'i's economy, and what experts say about them:
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| Andy Anderson
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Anderson emphasizes diversifying the economy, and says the state's tourism industry is nearly "maxed out." He would seek federal permission to make available 7,000 "green cards" for foreign high-tech workers, giving them resident status so they could live in Hawai'i and attract high-tech businesses.
He said he would create a Hawai'i Job Bank on the state's Web site to lure workers who have left the state, and he wants to expand tourist industry training by exporting the state's expertise to Asia.
Anderson also supports eliminating the state excise tax on purchases made by counties.
Boyd said Anderson's green card proposal amounts to "admitting defeat" — giving up on educating and training Hawai'i's own young people for high-paying high-tech jobs.
"Why haven't we produced those high-tech workers? Why are we importing them?" he said.
Cayetano said high-tech industry leaders already had asked Congress to relax immigration requirements for high-tech workers, and that it would be difficult to win federal approval for such a proposal.
Mak likes the job bank idea, but noted that the state already is exporting its tourism expertise to Asia. He said a federal advisory commission on intergovernmental issues had recommended against exempting counties from the excise tax.
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| Ed Case
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State officials who have been looking for a "silver-bullet industry" to save the economy should stop ignoring existing businesses, Case says. He would ease the burden on Hawai'i businesses by reducing government regulation.
Case wants targeted tax incentives, plus building and infrastructure improvements, to support industries such as high-technology, agriculture, health care and entertainment.
But he opposed a $75 million tax credit for an aquarium project at the Ko Olina resort, saying he would not support incentives geared toward specific projects without evidence the project could not go ahead otherwise.
Case does not believe the state can afford big tax breaks for individual businesses for at least two years, but said he wants to continue to reduce the "pyramid effect" of the general excise tax.
Mak agrees that reducing regulation is important to Hawai'i businesses. "People keep raising the issue of government regulation — most of them have to do with getting permits to develop," he said.
But reducing the general excise tax further probably is not necessary, Mak said, because the state has done enough to reduce its pyramid effect in recent years.
"Basically, all the worst aspects of pyramiding of the general excise tax has been taken out," Mak said. "It's kind of like saying you need to keep your bedroom in pristine shape, and I want to see no single speck of dust. Well, the last speck of dust is not worth getting sometimes."
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| Mazie Hirono
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Hirono would diversify the economy by marketing existing state tax credits to encourage high-tech development, creating a technology advisory group to identify high-tech trends and an aloha team to identify companies that should be encouraged to expand here. She also wants to pursue sister-state relationships in Asia to promote Hawai'i as a place to do business.
Hirono supports giving tax credits to encourage an aquarium, ocean science research center and other development at Ko Olina, as well as any other "responsible" tax incentives directly tied to a public benefit or aimed at strategically encouraging growth of targeted industries. She also favors tax incentives for farms that offer high-quality or distinctive products unique to Hawai'i.
Hirono proposes appointing a small business advocate within the governor's office as a way of giving these businesses a greater voice in state policies and regulations.
Cayetano does not believe such a change would be "significant."
"Either the administration is pro-small business or it's not," he said. "You don't need an advocate for that. Already they are among the most outspoken of all people, and we've tried to accommodate them."
He also noted that the sister-state relationship idea had been tried. "We've been doing that all these years. I mean, I don't go to all of these meetings for nothing," the governor said, pointing out existing relationships with Hiroshima, Yokohama and Beijing.
"I think you can begin to intensify those relationships to see wheth-
er you can add more to it, to maximize the educational exchanges and things like that, but this is not a new idea."
Mak noted the existence also of teams to identify high-tech trends and companies to lure here. And he does not approve of using the controversial $75 million tax credit for the aquarium and ocean science research center at Ko Olina.
"I have not run into a single economist that says that is good tax policy," he said.
Reach Lynda Arakawa at larakawa@honoluluadvertiser.com or at 525-8070.
