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Creating Unnecessary Tax Credits For Water

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By Lowell L. Kalapa

Water, Water, everywhere. You would think that we have had our fill of water, yet water is the hot topic of a couple of tax bills making their way through the legislative maze.

The first one is actually a renewal of a current tax credit that was adopted five years ago to encourage taxpayers to build drought mitigating water systems otherwise know as water storage tanks or water catchment systems to bank water from wet periods for use during drought periods of the year. To some degree, the water reservoirs of recent note in Kauai could qualify as a “mitigating water storage facility” for which the 4% credit would be available.

The intent of the credit was to help farmers and ranchers minimize losses of not only crops and cattle but also jobs during periods of drought. In adopting the bill in 2001, lawmakers cited the fact that not only do farmers lose income as a result of not having sufficient supplies of water, but agricultural suppliers, as well as retailers of the produce, lose business and therefore the state loses tax revenues.

The measure under consideration this year would extend the life of the tax credit for another five years. The problem is that the current credit, which expired at the end of 2005, has attracted little interest. According to the department of taxation, only $6,000 in tax credits was claimed in the most recent year for which they have statistics. That means only $150,000 was spent by taxpayers to build or repair such water storage systems. Citing this fact, it was noted that perhaps this tax credit is an insufficient incentive to get farmers and ranchers to build these systems. One senator suggested that the credit should be increased to something on the order of 20%.

Unfortunately, lawmakers seem to be out of touch with the real world and problems with which farmers and ranchers must deal. The credit is only available if farmers and ranchers undertake the project which requires capital – money. If farmers and ranchers don’t have the money, or are not capable of borrowing that money because they are viewed as high-risk clients, then they will never be able to take advantage of the credit. So there must be something else that goes far beyond the tax credit to get farmers and ranchers to build such water storage systems.

Lawmakers may want to investigate low-interest or no-interest loans or set up a revolving fund seeded with general revenues of the state. Again, the problem with a credit is that it requires an up-front investment and unless the taxpayer has the funds, the credit is of no benefit.

The other measure being considered would encourage landowners to maintain and repair the network of irrigation ditches that was constructed more than a century ago to feed the booming sugar and pineapple industries. With the phasing-out of sugar and pineapple as major industries, these irrigation ditches have fallen into disrepair. Not only are these ditches important for irrigating agriculture, but these ditches also divert the natural runoff from what today are well-developed urban centers.

The measure sets up a grant fund for which landowners may apply for a grant provided they put up a matching amount. In turn, once the repairs have been undertaken with the grant and the matching funds, the land owner could then turn around and apply for a tax credit in the amount of the matching funds he brought to the table to secure the grant funds. In other words, the repair and maintenance of these irrigation ditches would be 100% funded by taxpayer dollars.

So why, might you ask, should a landowner go through the contortion of applying for a grant, putting up the matching funds to secure the grant and later applying for a tax credit? The devil is in the details. One of the conditions of securing the grant is that the landowner must designate a two-mile radius around the irrigation ditch to be repaired as important agricultural lands or IAL’s. IAL’s are supposed to be the best land for growing crops and can never be used for any other purpose.

However, as one landowner pointed out, many of these irrigation ditches run along ridge lines high up in the mountains where the water flow begins and then use the force of gravity to run down gulches and valleys to reach the flat lands where cane and sugar used to be grown. So designating these basically unusable lands as important agricultural lands makes absolutely no sense, as they can never be farmed.

Guess it is back to the drawing board!

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