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Passage Of Credits Almost Overwhelming

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By Lowell L. Kalapa

(Released on 04/15/07)

Apparently, lawmakers think that there is no bottom to the barrel as they pass out this credit or that exemption for certain taxpayers.

And no wonder they believe so as the state recorded its largest general fund surplus ever, checking in with a fund balance of more than $700 million at the end of the fiscal year 2006. With all that money no wonder the dreams of sugar plum fairies abound at the state capitol. And lawmakers are making up for lost time by both spending those surplus dollars out the front door as well as out the back door in the form of credits and exemptions.

Not having the political will for more than thirty years, lawmakers are extending carrots for land owners to designate their agricultural land as “important agricultural land.” Mandated by the 1978 constitutional convention to preserve important agricultural lands, lawmakers went through a number of iterations attempting to identify and designate what is to be considered important agricultural lands such as the long awaited land evaluation and site assessment process.

So apparently not wanting to take the blame for designating someone’s land as important agricultural land, lawmakers are passing a bunch of tax incentives to lure landowners to designate their lands as such. One measure would provide a tax credit equal to 100% of the qualified agricultural costs incurred by the landowner where 50% of the land owned is important agricultural land.  In other words, any costs that qualify as agricultural costs would be refunded to the landowner where 50% of the land owned is designated as important agricultural land. The costs don’t necessarily have to be incurred on that portion which is the important agricultural land.

Another measure would exempt from the net income tax and the general excise tax lease rent derived from land that is designated as important agricultural land while yet another would refund landowners or their lessees the cost of the real property tax imposed on such lands up to an aggregate annual total of $10 million. Never mind that the credit for real property taxes represents an indirect subsidy of county government.

Then there is the exclusion of capital gains derived from the sale of the fee simple interest in property within a condominium project, cooperative project or a planned unit development. The exclusion would apply to transactions occurring in the next couple of years and then would sunset. Proponents of the bill believe that such an exclusion would entice landowners to convert their leasehold ownership to fee simple for the owners of units in such projects.

And when it is pointed out that the federal tax on the capital gains would be much more of a deterrent, the proponents say that there is pending legislation in Congress to also provide for a similar exclusion. Of course that was the same battle cry used when Hawaii established individual housing accounts back in the 1980’s. Congress never adopted individual housing accounts and that provision has caused many problems for Hawaii taxpayers who went ahead and set up such accounts.

Ah, but how can one argue against motherhood and apple pie for those who want to purchase their leasehold interest in fee? And how many landowners will be willing to sell their leasehold interest? As evidenced by the repeal of the mandatory conversion ordinance in Honolulu, many of those land owners still have an emotional attachment to their property.

Then there is the measure that would adopt a federal tax credit called the New Markets Tax Credit which refunds 39% of an investor’s costs where the investment is made in a low-income area. The state credit would be on top of that federal amount. Ironically, the federal credit was to have expired this year but was extended for one more year by last year’s session of Congress. Given that the credit would have expired this year, it is obvious that the state credit will only benefit someone who is already in the process of making the qualified investment anyway.

What will happen when the economy takes another dive and the money is just not there to be handed out? Will lawmakers have to raise taxes to keep these credits funded and government running?

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