Legislators agree that economy is top priority

By Sean Hao
Advertiser Staff Writer

In a year when the balance of power in state government has shifted, there is bipartisan agreement that the state needs to place even greater emphasis on business and economic development in this year's Legislature.

Balancing the budget while stimulating the economy will not be easy for the Democrat-controlled Legislature and new Republican Gov. Linda Lingle.

But Democrats this week rolled out a package of business and economic measures they hope will do just that. It include cutting regulatory burdens, lowering medical costs for small businesses and creating tax incentives for agriculture and job creation.

Financing the new incentives will be a challenge, given the state's fiscal health. In Lingle's draft budget, sent to legislators last week, only about $30 million was earmarked for new tax incentives. More details of Lingle's plan to improve the state's economy should surface in her State of the State address tomorrow.

House Majority Whip Brian Schatz, D-25th (Makiki, Tantalus), said the state's limited resources will require a more disciplined approach to economic development.

"This budget year is one of the worst that we've seen, directly resulting from the downturn in tourism since Sept. 11," said Schatz, who chairs the House Committee on Economic Development and Business Concerns. "There's a recognition that we have to do business in a different way.

"I think we have the opportunity to evaluate the current strategy and change it."

Schatz said the state needs to develop short- and long-term economic development strategies that focus on expanding large industries such as tourism and construction, which can generate immediate revenues and jobs.

At the same time, Hawai'i needs to nurture fledgling industries such as technology and biotechnology, he said. That could take the form of targeted tax credits for private construction of leasable laboratory space and dormitories, which would ease the capital burden on the University of Hawai'i, Schatz said.

There likely will be additional debate over whether to change Act 221, the controversial tax credit to spur high-tech venture capital investment. In addition to helping attract money for technology companies, the incentive provided more than $18 million in tax credits to investors of the film "Blue Crush," a target of criticism from those who felt the credits should go exclusively to high-tech firms.

Incentives for large projects such as $75 million in tax credits for developers of the 642-acre Ko Olina Resort & Marina and a commercial construction tax rebate also may be resurrected in some form. Both passed last session, but Gov. Ben Cayetano vetoed them.

Given the state's massive budget deficit, expanding tax breaks for activities ranging from hotel renovation to commercial construction may not be feasible, said Tom Smyth, administrator of the business support division of the state Department of Business, Economic Development and Tourism.

Commercial construction tax credits "will probably cost too much," Smyth said. Tax incentives for remodeling hotels have more economic impact than other types of commercial upgrades, he said, because they can result in additional tax revenues from increased tourism.

"If I remodel a grocery store, I don't get a lot more sales out of it," he said.

Legislation designed to help a broader range of businesses include a tax credit of as much as $1,500 for employers increasing job positions by 10 percent. In an attempt to foster the state's high-tech and knowledge-based industries, the credit would apply only to jobs that pay at least $39,000 annually.

Such performance-based incentives, which require a company to deliver before getting a tax break, make sense, said Mike Fitzgerald, president and chief executive of Enterprise Honolulu, a nonprofit economic development organization.

But Fitzgerald would like to see the salary requirement cut to about $25,000 to help a larger base of businesses.

"It's the right way to help the business community grow and diversify," Fitzgerald said. "If you get a few thousand businesses adding one, two or three jobs each, you're talking about a huge impact on the economy."

Also under discussion in the Legislature is a measure to create enterprise zones for agriculture, which would give businesses in certain areas access to tax rebates for agriculture-related spending on equipment, cleaning the environment and new jobs.

There's also a measure that seeks to ease regulatory burdens on local businesses by eliminating rules still in force after a law is repealed. Majority leaders also want to create a state cooperative that would allow small businesses to purchase medical insurance at lower rates.

Jim Tollefson, president of the Chamber of Commerce of Hawai'i, said he supports many of the Democratic proposals.

"I applaud the intent of the package," Tollefson said. "Regulatory reforms are something that would be helpful in creating a more business-friendly climate."

For their part, Republicans in the Legislature are proposing broader tax cuts, including a 0.5 percent, across-the-board reduction in the general excise tax. The GOP proposal also would eliminate the general excise tax on food and medical services, though that has been rejected by House and Senate Democrats in the past.

Nor is it clear how well other Republican proposals, such as deregulating the ground and maritime transportation industries and the electric and gas companies, will fare. There are 15 Republicans in the 51-member House and five in the 25-member Senate, but this year the Republicans have a strong voice in Washington Place.

Legislators on both sides of the aisle said they expect to work with Lingle to improve the economy in some fashion this session.

"We know we have a short period of time and a short window of opportunity," said Sen. Sam Slom, R-8th (Kahala, Hawai'i Kai), who also runs Small Business Hawaii.

"We know that we have to show results."

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