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Judging the Public Finance Issue of the Ko`Olina Credit

posted in: Weekly Commentary 0
By Lowell L. Kalapa

Obviously the generous tax incentive to build a world-class aquarium out on the western plains of Oahu will be revisited again by next year’s legislature as it was part of the campaign promises both gubernatorial candidates made.
And again, the issue of whether or not it is appropriate to use the state tax system to finance a project, let alone a privately developed project, will engender a lot of discussion. Aside from the fact that granting this credit to what will be a specific taxpayer or developer would set a precedent for other similar requests, there are a whole host of other public finance issues.
One of the basic questions that should be asked about the project is that if it is paid for with tax credits that otherwise came from other taxpayers – because it is a shift in tax burden from those who qualify for the credit to those who must still pay the bills that keep government operating – then why doesn’t the government and therefore taxpayers own the project?
Indeed if this is to be a state facility, then why use the backdoor means called tax credits to pay for the project? What happened to good old capital financing of the project which means issuing bonds and borrowing the money to pay for the construction of the facility? Taxpayers are going to pay for the project one way or another, so they might as well own it.
More importantly, when a public facility like this world-class aquarium is funded, it must undergo the scrutiny of the legislature in appropriating the funds or authorizing the debt and must compete with all other projects as far as being a priority for public funds. The use of the tax credit approach allows elected officials to absolve themselves from the responsibility of oversight and accountability for the expenditure of those funds.
For example, if this is to be a public facility, what sort of oversight would there be with the private developer making all the decisions to prevent the installation of 24 karat gold water spigots in the bathrooms. Or at the opposite end, what oversight would there be to prevent the use of cheap plywood instead of real lumber?
Hey, no problem if this was a private project that is to be owned by private individuals or companies. They can complain about the quality of the construction. But in this case, the world-class aquarium will be paid for with tax dollars through the back door. This is hardly an accountable means of spending your tax dollar.
The proponents argue that the creation of such a world-class attraction will spur the development of the western plains of Oahu and create all sorts of jobs for the people of the Leeward Coast. But wouldn’t the same thing happen if government built the project using either direct tax dollars or issuance of debt that would be repaid over time?
That is the real question here for lawmakers and others who support the Ko’Olina tax credit. Where is the accountability in all of these discussions? Where is the oversight and the assurance that the project will meet the expectations of not only lawmakers but taxpayers as a whole? And why do lawmakers think that this way they will not have to come up with the money? Are tax credits like some imaginary money that really doesn’t exist?
One lawmaker whined, “We didn’t have the money last year to build this in Kaka’ako and that’s why we need to approve this bill!” Let’s face it, if lawmakers didn’t have the money last year, what makes them think that they are going to have the money to cover the shortfall created by the tax credits over the next few years?
Ah, but as the lawmaker points out, the activity from all that construction will bring in all sorts of new tax revenues. And what makes him think that financing the same project with bonds and other government resources wouldn’t create new tax revenues as well?
Before lawmakers and others jump in the Trojan horse, they should stop and look at all the implications of adopting a tax credit for one specific taxpayer who will build a specific project in a specific geographic area. They need to ask themselves what kind of precedent they will set for future requests that resemble this proposal. More importantly, they need to ask who will be accountable for the expenditure of these public dollars and they need to understand that tax credits are nothing more than backdoor expenditures of public funds, spending over which they will have no oversight and no accountability.

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