Hawai'i banks see profits grow and tax bills shrink

By Sean Hao
Advertiser Staff Writer

Thanks largely to a strong economy, last year marked a banner year for shareholders with stakes in Hawai'i's big banks.

State officials could be forgiven, then, if they expected the revved-up economy to produce a bonanza in bank franchise taxes, the tax on income generated by banks and other financial corporations.

Instead, the three banks saw their tax bills shrink — and in one case disappear — despite rising profits as the financial institutions cut their taxes through state credits and other tax breaks.

All told, the state saw bank franchise tax collections drop from $11.1 million for the first eight months of fiscal 2003 to about $4.5 million during the same period in fiscal 2004, the latest figures available.

There's nothing illegal about financial institutions taking legal steps to minimize taxes.

"We do, like any other taxpayer, try to reduce the amount of taxes we pay, within the rules," said Rick Keene, Bank of Hawaii Corp. executive vice president and controller.

But with state officials scraping together every cent possible to balance their $3.6 billion budget for fiscal 2005, the tax credits and breaks are getting a closer look. And although franchise taxes contribute a tiny percentage of the state's overall revenues, the state is questioning the claims in two cases.

Tax credits explain some of the state's financial woes, said Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i. But he doesn't fault companies for seeking them.

"If the law is there already, use it," Kalapa said, though the result is "you only shift the burden to somebody else, because you still need the money."

Among the banks reporting higher profits and reduced or no tax bills last year were:

• CB Bancshares, owner of City Bank, which reported a 54 percent increase in net income, to $20.7 million. The company reported in its annual filing with the Securities and Exchange Commission that it paid no state franchise taxes in 2002 and 2003.
• Bank of Hawaii, which saw profits rise nearly 12 percent, to $135.2 million in 2003, while its state tax bill fell about 28 percent, to $2.9 million.
• Central Pacific Financial Corp., parent of Central Pacific Bank, which posted a 2 percent rise in profits in 2003, to $33.9 million. The company's tax bill fell in 2003 to $1.5 million, from $4.2 million in 2002.

While the banks paid less or nothing in franchise taxes to the state, their federal tax payments rose for the comparable periods. (The maximum federal tax rate is 35 percent, while Hawai'i' s top rate is 7.9 percent.)

Several factors besides profits can affect how much a bank pays the state, such as depreciated assets, the amount of losses carried from year to year and accounting of costs between U.S. and foreign operations. As a result, gross income and taxable income don't necessarily correlate.

Banks can cut their state taxes by claiming tax credits for such activities as financing low-income housing and technology research and investment. The savings can be substantial.

CB Bancshares claimed $2.8 million in tax credits in 2003 and $1.8 million in 2002. City Bank's savings came from state energy tax credits, created when businesses lease solar, wind and other energy generation devices from the bank, said Dean Hirata, chief financial officer for CB Bancshares.

"These are programs that are promoted by the state that we've seen as a tax opportunity for the bank," he said.

Similarly, Bank of Hawaii said energy and low-income housing tax credits factored into a year-to-year decline in its state tax bill, Keene said.

Specific tax information from two other large banks, American Savings and First Hawaiian Bank, was not available from SEC filings, since each is owned by large parent companies that do not break out such numbers. Both banks declined to provide specific information about their state tax bills.

What's known from Federal Deposit Insurance Corp. filings is First Hawaiian Bank profits increased nearly 9 percent, to $136.1 million, while all taxes paid rose 7 percent, to $82.7 million, between 2002 and 2003.

American Savings Bank, which is owned by Hawaiian Electric Industries Inc., reported profits and overall taxes were essentially unchanged between 2002 and 2003.

But Hawaiian Electric Industries is contesting $23 million in total taxes and interest paid to the state from 1999 through 2003. About $17 million of that was paid in 2003, but the state set aside the sum in a special litigated fund.

The dispute involves subsidiaries HEI Diversified and American Savings, and whether they improperly deducted dividends received from subsidiary ASB Realty Corp. for tax years 1999 to 2001. ASB is a real-estate investment trust formed in 1998.

A trial is expected later this year. American Savings spokesman Craig Togami said the company would not comment on the case except to say that it believes its deductions were proper.

Central Pacific claimed $1.4 million in Act 221 high-technology tax credits in both 2002 and 2003. The bank said the tax credits came from investments in outside companies.

Central Pacific also is engaged in a dispute with the state over other taxes amounting to $6.1 million, on grounds similar to HEI's. Neal Kanda, vice president and chief financial officer for Central Pacific Financial, said the company generally takes a conservative approach to taxes.

"It remains to be seen what position the state will take" on the contested taxes, Kanda said. But he added: "We have a responsibility to enhance shareholder equity at appropriate risks set by management and the board. It's always a risk/reward relationship."

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