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Gotta Get it Right If It is to Be a Good Law

posted in: Weekly Commentary 0
By Lowell L. Kalapa

Looking back on the recently adjourned session and being asked to assess the outcome of lawmakers’ work, one can only wonder if lawmakers really took the time to examine the issues and craft legislation that is in the best interest of the community.

There are several pieces of tax legislation that give basis to that observation. Perhaps the most obvious is the tax credit proposal that would give owners of hotels a tax credit of up to 20% of the cost of the renovation or construction of hotel property. Even the governor has railed against this proposal, citing its generosity beyond reasonable.

Under the bill, taxpayers who make “qualified improvements” which are defined as improvements made on: 1) property that is primarily designated for hotel or resort/commercial use, including time shares; 2) residential property within an area designated by the county zoning code for hotel, resort, or time share use; or 3) property that is not so designated but is primarily used for hotel, resort, or time share use, can claim the credit. The credit would then be a percentage of the value of the improvements made.

If the improvements over a three-year period total less than $1 million, then the credit would be equal to 4% of the cost of the improvements. The percentage would then rise depending on how much in improvements was made. For example, if the improvements equaled $10 million or more, the amount of the credit would be equal to 15% of the value of the improvements and at the top end, if the value of the improvements totaled more than $30 million, the credit would be equal to 20% of the value.

Aside from the fact that the amount of the tax credits proposed are overly generous at a time when the state has no money to spare, there are other provisions of the bill which are questionable. For example, the credit would be extended to improvements made to any type of property regardless of whether or not the property is used as hotel accommodations. As noted earlier, the credit could be extended to residential property or commercial property as long as the property is located in an area designated as hotel/resort property. Thus, those taxpayers who are not so favored as to be located in hotel/resort zoned areas would be denied the credit if they made renovations, yet in many cases, those commercial and retail properties would be in direct competition with their counterparts who are located in a hotel/resort zoned area.

Another bill would grant a tax credit up to 2% of the cost of leasing aircraft that will be used in the transportation of goods and passengers between points within the state. The credit would be granted to the lessee of the aircraft who has entered into an operating lease before or after the effective date of the bill. While this measure was proposed to deal with the issue of the state collecting the 4% general excise tax on lessors of such aircraft equipment to the local airlines, a last minute addition to the bill will end up favoring one carrier over the other.

Although the issue never was a part of the discussion of the bill before it went to a conference committee, the bill as it is being submitted to the governor for approval will require that the aircraft be “stage 3” compliant. Huh? What is this “stage 3” compliant? Well, as it turns out, it denotes that the aircraft engines are more quiet than its predecessor engines. Because moving up to this next level of engines would have proven costly for the two local airlines, the congressional delegation was able to secure an exemption for Hawaii from the federal regulation requiring “stage 3” compliance.

Thus, it appears that lawmakers have decided to give the tax relief only to those aircraft which can meet this federal guideline. Thus, depending on where the two local airlines are in their effort to modernize, the tax credit will be granted only to those which meet the “stage 3” guideline. In the committee report, lawmakers argue that extending the credit only to “stage 3” aircraft will encourage the airlines to invest in quieter aircraft.

Unfortunately, lawmakers have missed the point that the airlines have tried to make, and that is the cost of the tax merely will increase the cost of operating in the state. Requiring that the airlines have aircraft that is stage 3 compliant ignores the reason why the exemption was sought in the first place – the added cost. Thus, the proposed credit will only benefit what few new aircraft that will come on line in the next few years. Thus, the credit is useless for aircraft now in service. Thus, this is the tax relief that isn’t.

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