House pushing variety of business tax credits

By Sean Hao
Advertiser Staff Writer

While the state Senate considers increasing the general excise tax to raise $80 million a year for education, members of the House are weighing whether to create business tax credits that could cost the state an estimated $78.9 million annually.

This week the House Finance Committee advanced to the floor four tax credits for businesses, including an expanded hotel construction and remodeling rebate and a new 4 percent to 10 percent tax credit for commercial construction.

The Tax Department estimates that the tax credit for hotels would cut tax revenues by $32.9 million while the construction tax credit would cost another $46 million.

The House Finance Committee also approved a $5,000-a-job tax credit for businesses that create new jobs and a bill that would establish "renaissance" zones that would exempt individuals and businesses in certain areas from income and general excise taxes. The Tax Department does not have an estimate for how much these two tax credits would cost.

With the state facing a budget deficit and with tax collections running well behind estimates, it's unlikely the House will pass all of the business incentives.

"We just can't afford them," said Lowell Kalapa, president of the Tax Foundation of Hawai'i.

"They're struggling just to balance the budget."

The hotel industry has benefited from an increase in the existing tax credit for construction and remodeling, which went from 4 percent to 10 percent after Sept. 11. The new bill would extend the credit to 2008.

A companion measure is in the Senate Ways and Means Committee.

The Tax Department is not sure how much the hotel tax credit has cost the state. The hotels saved $7.1 million on their tax payments in 2000 because of the tax credit.

The department is now compiling information for 2001.

Incentives such as the hotel tax credit and the Act 221 technology investment tax credit may be why state tax collections are growing at a significantly lower rate than previously estimated.

Those concerns explain why critics are calling for cost-benefit studies for new tax breaks so the state can pinpoint whether it is getting a return on its money.

House Majority Leader Scott Saiki, D-22nd (McCully, Pawa'a), said the Finance Committee plan calls for tax credits to take effect only after a cost-benefit analysis and if there is 7.5 percent growth in tax collections for three years. They'll also have sunset provisions, he said.

"Our agenda will be to look at tax credits very carefully and make sure that they really have the impact that's intended," Saiki said.

Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.