Diversification back on state agency's agenda

By Sean Hao
Advertiser Staff Writer

The just-concluded legislative session began with discussion of a massive restructuring of the state Department of Business, Economic Development and Tourism, which over the years has become a repository for programs with disparate missions. What ultimately emerged from the session was minor tinkering with DBEDT and the start of another plan on how to diversify the state's economy away from tourism.

"There was a lot of resistance from within the department for a wholesale reorganization and that made it extremely difficult," said Rep. Brian Schatz, D-25th (Makiki, Tantalus), Chairman of the committee on economic and business concerns. "I think we made some progress, but we have a long way to go in diversifying our economy."

There was agreement over moving the Housing and Community Development Corporation of Hawai'i out of DBEDT and into the Department of Health and Human Services and to create a plan for diversifying the economy in the long-run. No added money was earmarked to develop such a road map.

Once completed, that plan would share shelf space with several prior studies and plans done during the 1990s and earlier including those with names such as the Hawai'i Economic Revitalization Task Force, Hawai'i Tomorrow, Hawai'i 2020 and Ke Ala Hoku.

Many of these plans touched on the need to diversify the economy by improving the state's entrepreneurial climate through less regulation and lower taxes. So, does Hawai'i need another plan to figure out how to boost growth of non-tourism industries? Yes, according to Schatz.

Schatz said the idea behind a new plan arose when it became apparent that the new administration would not back his proposal for a wholesale restructuring of DBEDT. At the same time the Legislature balked at Gov. Linda Lingle's plans to restructure DBEDT by merging the Aloha Tower Development Corp. and the Hawai'i Community Development Authority and by merging the Land Use Commission and the Office of State Planning with the Department of Land and Natural Resources.

Economic diversification has been discussed for decades, but long-standing hurdles include Hawai'i's geographic isolation, powerful unions, high labor costs, a tough tax and regulatory environment, a lack of available workers with high-tech skills and a mindset that emphasizes controlled economic growth.

In the past several years, progress has been made in boosting areas of diversification such as agriculture, and eco-, health- and edu-tourism. And among the most significant steps to spur the state's fledgling high-tech sector was the Legislature's passage of Act 221, which provides tax credits for technology investment and research.

"It's not that the state has done nothing," said DBEDT Director Ted Liu, who's charged with drafting the new plan. "Progress has been made, but the impact has not been felt tangibly and that points to the size of the problem."

Liu said he'll rely on work done by other groups including the Economic Revitalization Task Force and a recent report on Hawa'i's technology industry prepared by the Hawaii Institute for Public Affairs as he drafts the plan in advance of a yet-to-be scheduled economic summit later this year.

"We don't have to go through the entire process to identify the issues," Liu said. "We sort of know what it is we have to do. We have our mission, now how do we get there?"

A good first step would be to deregulate, trim the size of government and lower taxes, said Leroy Laney, a Hawai'i Pacific University economics professor. Those three items have been raised in several past plans for the economy.

"I think those things would foster a more entrepreneurial spirit in the state." he said. "I don't think we're going to get any single thing that's going to replace tourism. But I think anything we can do to lower taxes would be good for the economy."

Tax reform of various forms have been common themes in several plans for Hawai'i's economy over the years and were included in the recommendations of the Hawai'i Economic Revitalization Task Force in 1998. That resulted in a cut in individual income taxes and reforms of the general excise tax on the resale of services. However, other task force recommendations such as reductions in corporate income taxes and increasing the general excise tax were never accomplished.

"The state would be a hell of a lot better off, if we had passed (the task force recommendations) as a package," said Rep. Joe Souki, D-8th (Wailuku, Waiehu). "I guess the Legislature didn't have the stomach for it."

Tax Foundation of Hawai'i President Lowell Kalapa agreed that the tax cut of the late 1990s lessened the impact of the 2001 terrorist attacks. However, by not also reforming and raising the GET and by creating several new tax credits the state set itself up for its current budget problems, he said.

"I think (the tax cut) was one of the reasons we were coming out of the recession when 9/11 hit," he said. "The rationale was we could do without the (tax) raise, if we could control expenses" which didn't happen, he said.

Given the state's current weak financial condition, Hawai'i can't afford tax cuts now, Kalapa said, and raising taxes would send the wrong message considering the state already has a reputation for high business costs.

However, the state could afford to lower taxes by broadening the tax base and eliminating targeted tax credits for specific industries, said Chris Grandy, a professor of public administration at the University of Hawai'i.

He said another plan for Hawai'i's economy would be of limited use because it would likely involve supporting one local industry such as high tech over others. States historically have had little success in growing certain industries through targeted incentives, Grandy said.

Instead, the state should create a more business-friendly environment by eliminating tax breaks for hotel construction and high-tech companies and leveling the playing field for all businesses, Grandy said.

"Let those businesses that are going to be successful identify themselves, but don't have the state choose which businesses those should be," Grandy said.

Mike Fitzgerald, president and chief executive of Enterprise Honolulu, disagreed with Grandy's position, insisting that diversification lay in supporting niche industries where Hawai'i has a comparative advantage such as oceanography, commercialization of defense technology, alternative energy and so called "captive" insurance among others.

Whether the state's various factions — including labor unions, business leaders, the Democrat-controlled Legislature and the Republican administration — can build the consensus to implement any new plan remains to be seen.

"I think it's possible, but it may be a dream," Kalapa said.

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