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Subsidizing the Construction Industry Has Alternatives

posted in: Weekly Commentary 0
By Lowell L. Kalapa

Among the numerous tax credit proposals introduced into the session this year are those which have both direct and indirect benefits for the construction industry.
For example, there was a tax credit proposal that would encourage the renovation or reconstruction of commercial, hotel, and industrial facilities that are 25 years or older or are located in districts which are at least 25 years old. While the measure has been corrected to reflect the fact it is the building or facility that has to be 25 years or older, the long and short of it is that it would create activity for the construction industry. Then there were several bills that would provide tax credits for the retrofitting of existing facilities to accommodate high technology businesses. Again the construction industry would benefit because of the tax incentive to renovate.
Of course, the big bill of the session, the bill to address the backlog of school maintenance and repairs, contains a 10% tax credit for architects, engineers, contractors, and surveyors who contribute in-kind services with an annual limit on the credit of $40,000. Again, a direct financial benefit to these players in the construction industry.
While these measures are all pending final approval by the legislature and then the governor, there are tax credits already on the books which benefit the construction industry such as the controversial hotel renovation tax credit which had to be passed by two consecutive sessions because of the flaw in the initial bill. Again, this was a tax credit that supposedly enticed hotel owners and operators to either construct new facilities or renovate existing hotel facilities. The beneficiary in the end was the construction industry.
Why is there such a push to provide tax incentives to stimulate construction activity? Well, aside from the efforts of the industry’s lobbyists, there is the mis-perception that somehow the health of the construction industry has a direct relationship on the economy as a whole. Perhaps that perception is a holdover from the good old days of the late 1980’s and early 1990’s when construction was in its heyday experiencing 30% annual growth rates.
The problem with the wistful hopes that Hawaii’s construction industry can return to those heyday high water marks is that the economies that supported that kind of activity are no longer thriving. What drove the building boom of the 1980’s was the investment of capital largely from Asia and in particular by the Japanese. Given the Japanese economy’s current state of affairs, it is highly unlikely that Hawaii will see the same sort of capital infusion any time soon.
Thus, the adoption of tax incentives that basically subsidize or prop up the construction industry in the hopes that there will be enough of them to keep the industry at peak levels until the next building boom is myopic at least and self-serving at best. What is needed is a real growth in demand for construction activity. And believe it or not, state government stands in the way of what might be another construction boom.
One only has to look makai out from the windows of the state capitol to behold what could provide the construction industry with all the work it could handle for the next four to five years. That view is the Honolulu harbor where the state controls the leases of all the port facilities and surrounding warehousing facilities. Private companies lease areas around the harbor so that they can receive and store the materials and goods shipped into or out of the state.
Many of those lessees are using facilities that were probably built before or around the time of statehood more than forty years ago. Many of those businesses would like to update those facilities to make their operations more efficient. They would like to take out loans from the banks to undertake these renovations and new construction. But guess what? The banks won’t lend them the money and some owners don’t want to invest huge sums in those facilities.
Why? Because the state has been unable or perhaps unwilling to issue long-term leases because three different agencies are fighting over who has jurisdiction. So while these lessees could be updating their facilities and therefor providing work for the construction industry, state agencies continue to argue and the lessees must contend with month-to-month rentals. If the construction industry really wants to stimulate new work, this is a problem they should help to solve.

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