Posted on: Sunday, February 8, 2004
Value of tax breaks uncertain
By Sean Hao
Advertiser Staff Writer
Millions of dollars have been given to businesses in an effort to breed the cutting-edge technology jobs of the future and strengthen the state's economy. However, state officials have little, if any, idea of the numbers of jobs and wages created by a slew of business tax incentives granted in recent years.
Sound like Hawai'i? Yes, but that's also the problem faced by states nationwide as belt-tightening spurred by tighter budgets forces a reassessment of how best to use tax incentives. States ranging from California to Rhode Island are searching for ways to analyze the effectiveness of such incentives.
A similar debate now is occurring in the Hawai'i Legislature concerning the controversial technology tax incentive program Act 221. However, very little is known about how enterprise zones, tax-increment financing districts, low-interest loans, training grants and other subsidies are affecting state coffers and the economic climate.
"There are plenty of business subsidies on the books now that nobody has even reviewed," said Rep. Brian Schatz, D-25th (Makiki, Tantalus). "The scale of these subsidies has been increasing and outpacing our ability to track them and it's time we take a deep breath and perform some analysis to see what's working and what's not."
To ensure that these subsidies result in good jobs, Schatz is pushing a bill this session that caps the value of incentives businesses can get per job created. It also would require that businesses receiving such incentives meet certain wage requirements and annually disclose the amount of savings received. Businesses that don't fulfill job or wage goals would be forced to repay a portion of their tax savings, under the bill.
Among the little scrutinized incentives is a general excise tax exemption for construction of an aircraft maintenance facility and for revenues derived from aircraft service and maintenance.
That open-ended tax break was created in 1997 to encourage Continental Airlines to build a $24 million maintenance facility at Honolulu International Airport. The tax break, at the time estimated at $1.2 million, was expected to create 110 permanent jobs with salaries averaging between $50,000 and $55,000.
However, Ron Wright, Continental's managing director in Hawai'i, said that although the company had at one point reached that employment goal, it has since scaled back its local employment. He would not provide specific employment or tax savings figures.
"We're a little short of that" 110-job goal, Right said. "The work has diminished a little bit."
Aloha Airlines said it currently claims the tax exemption for aircraft service and maintenance, but would not provide details on how much money it has saved or whether the exemption resulted in new jobs. Hawaiian Airlines, which also is eligible, did not confirm whether it ever used the incentive.
That exemption, one of more than 40 on the books, is an example of how the state has little knowledge of how much money it's spending on economic development or the number of jobs and level of wages being created.
"That was the problem with Act 221 — there's no accountability, yet we spend a lot of our energy debating a $500,000 request from a social-service agency," Schatz said. "Investing in the resources to do this kind of analysis could save us tens of millions of dollars in unnecessary tax abatement subsidies and giveaways."
The high number of general excise tax exemptions and corporate income tax breaks given to Hawai'i businesses and a lack of cost/benefit data on business incentives also were the subject of criticism in a report by the state's Tax Review Commission last year. Still, just how much the state spends on its myriad of economic development-related business incentives remains unknown.
The tax department does not break out the cost of various excise tax exemptions. For 2002 all exemptions cost an estimated $380 million. And then there are tax credits.
The various tax credits including Act 221 cost the state an estimated $180.1 million in fiscal 2003, with $83.2 million of that loss due to corporate tax credits and $83.9 million due to tax credits for individuals, according to the Council on Revenues, which provides forecasts used to develop the state budget. The rest of that money was claimed by insurance companies.
To put that in perspective, last year the Legislature's two-year budget totaled $7.6 billion.
Though Hawai'i no longer faces the budget crises it faced this time last year, concerns about escalating costs of business incentives remain. Tax collections will have to grow at a faster rate than they did through December to meet the state Council on Revenues projection of a 5.2 percent increase for the current fiscal year ending June 30.
Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i, said the Legislature only has itself to blame for the problem.
"Who created the problem? The Legislature," he said. "I think it's a shame (that) after the horse has left the barn, we're going to pass a law that examines how companies take advantage of tax incentives that the Legislature decided to confer.
"The point to be made here is do your homework first."
Getting a handle on the economic impact of such credits isn't just a problem in Hawai'i, said Greg LeRoy, executive director for Good Jobs First, an independent group that tracks economic development incentives. States increasingly are interested in determining the economic benefits of an estimated $50 billion a year in tax breaks provided to businesses nationwide, he said.
"A lot of states just don't have the money to give away freely and need to make sure they get the most bang for the buck," LeRoy said. "There's a whole bunch of things going on that favor more accountability."
On average states have 30 different types of business incentives. Though just about every state provides tax breaks for economic development, only 10 require participating companies to disclose how much money they save. Nineteen states have at least some provisions to recapture revenues if companies don't meet economic development goals, according to LeRoy. And 43 states mandate that at least some business incentives are used to meet certain job quality standards.
Hawai'i was not included on any of the three aforementioned lists.
Supporters for what's labeled the Corporate Accountability Act include the AFL-CIO and the Hawaii Government Employees Association. Ted Liu, director for the Department of Business, Economic Development and Tourism, said he backed better economic analysis of new incentives. However, conducting such research on all economic development incentives was not possible with his department's current resources.
"To require us to do that across the board I think really creates a burden on my department, unless of course the number of analysts and resources ... and our budget are increased," he said during a hearing on the bill last week in the House Committee on Economic Development and Business Concerns. "That's a fact of life."
Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.
