Saturday, April 24, 1999

top goals: Tax
cuts, incentives

Isle lawmakers agree: A limit on 'pyramiding' is the key to recovery

This is one of several stories to run during the final days
of the Legislature, updating the status of major issues

By Mike Yuen


Legislature '99 When state lawmakers gathered this year, they promised their No. 1 priority would be to revitalize the economy. They agreed that one of the best ways to bolster the isle economy would be through tax relief and tax-related incentives.

Here, in question-and-answer form, is how key tax-related measures stand as House and Senate conferees ponder their fate:

Question: Is there consensus on what needs to be done?

Answer: Yes, most certainly on one issue. Both the House and the Senate are committed to passing a bill that would significantly reduce the "pyramiding" of the 4 percent general excise tax on every stage of sales and production.

Q: Why is it so important?

A: Because small businesses have long complained that the repetitive application of the excise tax - imposed at the wholesale and retail levels - means higher prices for both consumers and businesses. As Lowell Kalapa, president of the nonprofit Tax Foundation of Hawaii, notes, it goes to the heart of what ails Hawaii: the high cost of doing business and the high cost of living in the islands.

Q: Will consumers immediately benefit from a bill that alleviates the pyramiding of the excise tax by seeing lower prices?

A:No. The plan would be phased in over six years, which would gradually help small businesses more than consumers. Also, don't count on small businesses quickly passing on any savings to shoppers - businesses will at first likely need the extra money just to keep themselves afloat, say Kalapa and Bette Tatum, state director of the National Federation of Independent Business.

"I hope whatever reduced costs for small business will eventually mean lower prices," Tatum says. "It's a good first step. But we still have a long way to go."

Overall, Kalapa says, "Lawmakers should be a heck of a lot more scared of the state's economic situation."

Q: Haven't Gov. Ben Cayetano and House Speaker Emeritus Joe Souki (D, Wailuku) warned that the state may not have enough money to cover losses in revenue from a bill that significantly reduces pyramiding?

A: Yes, they did. Reducing pyramiding by dropping the excise tax to 0.5 percent at certain stages of production and sales is estimated to cost the state $150 million annually. That could mean cuts in government services, Cayetano says.

Q: What other tax breaks are lawmakers considering?

A:They're discussing tax incentives for the state's No. 1 industry, tourism, and for what they see as key industries of the future - high technology and health. For tourism, the incentives are hotel construction and remodeling tax breaks. Also on the table are proposals to exempt exported services from the excise tax, while imposing the use tax on imported services.

Q: Won't these initiatives also cost the state money and throw the budget out of whack?

A: The tax breaks would mainly be prospective. That means the state isn't going to lose money it already gets. The tax incentives are mostly for businesses not yet established in the isles.

The incentives, says House Speaker Calvin Say (D, Palolo), "are the carrot. They're to get businesses to come here."

Q: There seems to be a strong emphasis - at least in the Senate - to bolster high-tech industries. Will high technology be Hawaii's economic salvation?

A: Let's turn that question over to Kalapa. "Technology holds the fancy for some legislators," he says. "But why should we stress high technology and not other industries? What we should do is make Hawaii a better place to do business for all industries."

For instance, it doesn't help if new jobs here are low paying, Kalapa says. Employees will still have to cope with Hawaii's high-cost of living, he stresses.

Q: What about new taxes or higher taxes that would take more money out of the pockets of isle residents?

A: While Sens. Bob Nakata (D, Kaneohe) and Brian Taniguchi (D, Manoa) did propose to raise the excise tax to aid education, that plan did not move out of the Senate Ways and Means Committee.

Q: What about the proposal by Senate President Norman Mizuguchi (D, Aiea) to give the Board of Education authority over the state personal income tax and the power to impose a retail sales tax?

A: The House didn't go for the plan. It was killed in House-Senate conference negotiations yesterday. Lawmakers agree to hold future hearings on the proposal.

The proposal had bothered Kalapa. In his worst-case scenario, lawmakers might have concluded that there was a need for more revenue to balance the state budget; they would have then stripped the bill down to simply a retail sales tax - a new tax.

But, says House Majority Leader Ed Case (D, Manoa), sentiment among most lawmakers is to not impose any broad-based tax.

Other lawmakers note that Cayetano's plan for a value tax on cars was dead on arrival at the Legislature after he unveiled it.

The bills

Here are tax-related bills in House-Senate conference negotiations:


Contracting (SB44, SD1, HD2)

Exempts from the general excise tax amounts received from contracting and all services exported out of state. Imposes a use tax on imported services.

"Depyramiding" (HB232, HD2, SD1)

Aids businesses by significantly reducing the pyramiding of the general excise and use taxes. Also helps isle businesses by exempting exported services from the excise tax and by imposing a use tax on imported services.

"Depyramiding" (SB638, SD1, HD2)

Reduces the 4 percent general excise tax on wholesale sale of services by 0.5 percent each year over six years. In 2006, the rate would be 0.5 percent.

Diplomatic and air cargo tax breaks (SB646, SD2, HD3)

Exempts diplomats from the hotel room and general excise taxes and use tax on any property imported into Hawaii. Exempts the construction of air cargo operation facilities at any state airport from the excise and use taxes.

High-tech assistance (SB1583, SD2, HD2)

Offers tax incentives for investing in high-tech businesses. Prohibits taxes on Internet commerce. Exempts stock options from high-tech businesses from taxation. Exempts royalties from certain high-tech businesses. Creates tax credits for high-tech companies.

Hotel improvements (SB1325, SD1, HD2)

Establishes a qualified improvement tax credit for the capitalized costs of construction and equipment of resorts and hotels.

Information industries (HB377, HD2, SD2)

Provides tax incentives, special purpose revenue bonds and other incentives to spur the growth of knowledge-based industries.

Tax credits (HB375, HD1, SD1)

Offers tax credits for hotel construction and remodeling, and for financial institutions investing in venture capital in technology companies. Exempts call centers and certain health-care activities from the excise tax. Establishes an income tax check-off for the Hawaii Human Services Children's Special Fund. Even counties are helped: They would get an excise-tax reimbursement.


School board taxing power (HB150, HD2, SD1)

Proposes constitutional amendment to give the Board of Education taxing authority. It was killed yesterday.

Vehicle rental surcharges (HB765, HD1, SD2)

Raises auto rental and tour bus surcharge taxes to an unspecified amount.

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