Legislators weigh costs, benefits of tax credits

By Sean Hao
Advertiser Staff Writer

Hawai'i lawmakers continue to weigh numerous tax credits for various Hawai'i industries, but given the current struggles balancing the budget, the question is how much can the state afford.

Following a recent cross-chamber deadline, many large- and small-business tax credits remain alive including those for hotel and commercial construction, job creation and communities that are struggling economically.

The debate over how best to help the economy centers on whether the state's limited resources should be spent supporting existing small businesses, the hospitality and construction industries, the film industry, or specific projects such as Ko Olina.

Part of the problem in deciding on a strategy is that legislators still don't have a good handle on the benefits or costs of several tax credits already in place.

The available figures from 2001 show that recently enacted credits such as the technology investment tax credit — Act 221 — will cost the state $46 million in its first year. Yet the state does not know how many jobs or other benefits it has gotten for that money, said Sen. Carol Fukunaga, D-11th (Makiki, Pawa'a).

"We really don't have a good record of how much activity was generated from all of these credits," she said.

The Senate and the House are taking different approaches to address the problem.

The House wants to allow businesses to claim tax credits but only if state tax collections grow at a robust rate for two consecutive years.

The Senate wants companies claiming credits to be more forthcoming about how the amounts are spent and the types and number of jobs created.

Then there's disagreement over how to assess the costs of tax incentives. Hoteliers contend the 10 percent income tax credit they received for construction and remodeling expenses, put in place after the Sept. 11 terrorist attacks, resulted in a net gain for the state in higher income taxes and room taxes. Lawmakers are considering expanding and extending that tax credit, which expires this year.

Without the tax credit, Hawai'i's slowly growing economy would be in even worse shape, said Jeff Stone, principal developer with Ko Olina Co., which is seeking a $75 million tax credit to help offset the costs of building an aquarium at the Ko Olina Resort.

The hotel construction and renovation tax credit spurred $233 million in new hotel spending and $16 million in net new tax revenues since Sept. 11, 2001, Stone said. That includes projects at the Waikiki Beach Marriott Resort, Hilton Hawaiian Village and the Renaissance 'Ilikai Waikiki hotel.

"Without these credits we would not have had these hotels renovated," Stone said.

However, the state Tax Department estimates that extending the hotel construction credit will cost $32.9 million a year.

That sum does not account for possible increases in tourism and room rates resulting from the hotel renovations.

Before legislators and the Lingle administration can choose which new tax credits to support, they will have to decide on the kinds of cost and benefit assumptions to make, said Brian Schatz, D-25th (Makiki, Tantalus).

"We have to sit down and agree what those assumptions are before we can even start to negotiate. Otherwise, it will be difficult to make a decision," he said. "If tax incentives had no negative revenue impact, we would just pile them one on the other.

"Clearly some tax incentives have a negative revenue impact."

Without proof of a positive return, approving further tax credits in such a tough budgetary environment will be difficult. Schatz said he expects legislators will prioritize their support for various tax credits based on whether they have a proven, broad economic benefit with minimal impact on tax revenues.

Even before new tax credits are passed, state officials are considering raising taxes, imposing further spending cuts and raiding special funds to find $58 million needed to balance the current budget.

By keeping so many potentially tax credit bills alive, lawmakers are denying the inevitable — that there's no money available for them, said Lowell Kalapa, president of the Tax Foundation of Hawai'i.

"Not to decide is to decide, so they're just moving them along," he said. "Moving them like this doesn't make sense at this time."

Instead, the state should be looking to fix fundamental problems that stifle the economy, such as the high cost of doing business, Kalapa said.

Sen. Gary Hooser, D-7th (Kaua'i, Ni'ihau), agreed that tax credits are not the solution to Hawai'i's economic ills.

"Short-term, I don't think there's much we can do, tax incentives or not," he said. "The best thing we can do for our economy long-term is to focus on the local quality of life — security, education.

"If we can make some real progress in this, I think people will be flocking here."

One factor that state officials will need to consider as the look to spur economic growth is the possible war in Iraq and a likely drop in tourism that would follow.

In the event of war, the state would have even less financial leeway to give businesses a boost, Schatz said.

"In that case we wouldn't be looking at any tax incentives and we'd be looking at extreme measures to balance the budget," he said. "This budget year truly is worse than ever."

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