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Caught Sleeping At The Wheel

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By Lowell L. Kalapa

(Released on 4/06/08)

If it wasn’t so sad, some would chuckle at the lack of attentiveness of state officials to the plight of Aloha Airlines that resulted in its demise at the end of last month.

The media reported that despite keeping state administration officials and lawmakers posted to the declining health of the Airline’s finances, it received minimal support from either branch of government over the past year. Even the governor’s suggestion that the bankruptcy court not approve the shutdown of Aloha Airlines came as a surprise to a company that responded that the governor’s comments were misinformed. When Aloha announced it was shutting down its passenger service, it had gone from $3.8 million in unrestricted cash to just over $900,000 in about a week and half. How could the Airline keep flying with such little cash? Asking the bankruptcy judge to stop the Airline from shutting down is absurd, did they expect the Airline to fly on fumes?

When the question was posed as to whether the state should bail out Aloha Airlines, it was pointed out that the legislature had already set a precedent by guaranteeing loans of Aloha’s competitor back in 1993 and has provided also sorts of subsidies to private companies through the back door called tax credits. It is estimated that the high technology tax credits will approach $100 million alone in revenue losses from the state treasury. It seems unfathomable that lawmakers are willing to provide such subsidies to companies who have such a marginal impact on the state’s economy while ignoring one of the few ways residents and visitors alike use to get from one point in this state to another.

And don’t even to talk about the impact it will have on the 1,900 employees and their families and perhaps even those whose livelihoods depend on the passengers that Aloha Airlines delivers from one island to another. How does this employment disaster compare to the jobs that have been created by the tax credits for high technology, digital media productions or the promised ethanol plant? It seems that our elected officials should have been paying more attention to some of the basic services we need as taxpaying residents rather than being mesmerized by the latest economic development pitch of the medicine man. Instead of being concerned about the predatory lending practices of some less than scrupulous mortgage lenders, lawmakers should have been concerned with the predatory fare pricing of Aloha’s newest competitor.

Some may criticize having the state help out a failing company arguing that obviously the executives at Aloha didn’t know how to run the company. But that certainly was not the truth as every effort was made to try and stay in business in the face of rising fuel prices and cut rate fares that obviously did not cover the cost of operating the Airline. So should the state “bail out” Aloha Airlines? If “bail out” translates to just throwing money at the Airline to keep it afloat – a practice that state lawmakers like to utilize – no. Providing loan guarantees as they did with Aloha’s competitor is a precedent that has already been set. That might be one alternative to look at.

Both major interisland air carriers have been asking for relief from the general excise tax that they pay on the fuel they purchase. The measure has been around a couple of years and has yet to be successful. The airlines have argued that they use fuel that has been refined in the foreign trade zone and therefore is free from any federal or state taxes. And to the extent that for airlines that fly out of the state, the state has recognized that Hawaii can’t tax the fuel under the general excise tax. On the other hand, the tax department holds that because the fuel used by the interisland carriers is used to fly between points in the state, it should be subject to the tax.

However, the department’s interpretation is contrary to the federal interpretation which points out that even though the local airlines are flying between points within the state, because the airline leaves the three mile limit and flies over what is international waters, the interisland flights should, in fact, be considered interstate flights.

What is ironic is that the measure failed to pass last year because lawmakers couldn’t agree on a ceiling for the revenue impact of the bill. In retrospect, that move is disingenuous given the revenue impact that shutting down Aloha will have on the state. From lost wages to lost sales, the impact will be huge. Our elected officials are something like Nero fiddling while Rome burns or perhaps they are asleep at the wheel.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui NewsWest Hawaii TodayGarden Isle News, and the HawaiiReporter.com.

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