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Influencing the Direction of the State’s Future

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By Lowell L. Kalapa

Much of the political rhetoric of the season is focused on “improving” the economy, creating more and better jobs, and stimulating the economy.
Indeed, the appropriate description of what we have been hearing is political rhetoric. Sure we can talk about creating jobs, “improving the economy” and stimulating the economy, but one has to ask if any of the candidates has a clue as to what needs to be done. Given the track record of legislators over the last few years, one can truly say that elected officials have no clue as to what needs to be done to improve the outlook for the economy. And in some cases neither does the business community.
Lawmakers, looking for a quick fix, were gullible enough to buy into all sorts of tax incentives in the form of tax credits and tax exemptions for specific types of activities or industries. For example, the much touted Act 221 which is supposed to provide tax incentive to attract high technology activities to locate in Hawaii actually misses the mark. When one looks at the legislative history, the real intent of the bill was to provide venture capital to invest in high risk ventures like emerging high technology companies.
The point missed is that there are other high risk investments which need start up capital to get going. However, because the measure is focused almost solely on high technology activities, other high risk ventures aren’t favored under the provisions of the law. So if there was a low-tech agriculture venture, lending the venture capital to that proposal wouldn’t benefit from all the tax breaks under Act 221.
The same goes for the construction credits. Why should taxpayers subsidize the construction activity of those who happen to be doing new or renovation construction? Was this particular law a result of some good lobbying and not because this particular activity will stimulate the economy? In fact, talk to any Realtor and you will learn that there is very little inventory in the residential category of property for sale. In fact, people are standing in line to reserve a new house in new subdivisions. So is the tax credit for residential construction a waste of precious public dollars? Would this construction have happened anyway as a result of dropping interest rates?
In the meantime, state tax revenues will be reduced by the amount of the residential tax credits claimed. And likewise, those who are constructing a new home or renovating an existing one will continue to pay taxes that could have been reduced.
So what will it take to create a better outlook for the state’s economy or for that matter what will be needed to create the jobs people will need in the future? First of all, there is no quick fix. It will take some critical thought about what makes a particular place attractive to a potential investor in a new business or company.
While high taxes are one consideration, there is much more to attracting new businesses to invest in Hawaii. As noted in an earlier discussion, the risk and the return on investment is going to be a major consideration to the potential investor. If the investor perceives that the costs of establishing a business and operating it are greater than potential receipts of the business, then this is not a location that will reward the investor with some sort of reasonable return.
Certainly education and a skilled workforce will be a critical consideration for potential investors in Hawaii. On the other hand, unlike an earlier effort of the business community to focus solely on the education system in Hawaii, education is just one of many considerations. If efforts to improve education in Hawaii are not combined with efforts to create jobs, then all the efforts to improve education in Hawaii will result in insuring continued brain drain. If there are no jobs to which Hawaii kids can return, then the only alternative will be to stay on the mainland where the good jobs will be.
And while efforts may be focused on creating a better education system and promotion of the positive aspects of locating a business in Hawaii, that does not mean that efforts should cease to address some of the inherent and recognizable challenges to doing business in Hawaii. This means improving the tax burden for all businesses including those which are already in Hawaii. This includes the tax of regulation and permitting as well as costly site location and the cost of energy in the state. Again, it is a multi-facet challenge to create a better economy. There is no quick fix for improving the economic outlook.

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