Saturday, June 7, 2003

State of Hawaii

Gov wants to close
tax credit loophole

Lingle says investors in ethanol
plants now stand to earn extra

Gov. Linda Lingle says at least three investors interested in building ethanol plants in Hawaii think they can claim up to a 240 percent state income tax credit for such a facility.

If true, it would mean the state would be giving the ethanol developers more than twice as much back in tax credits than they spend building the facility.

Lingle does not think a 240 percent tax credit is allowed by the law, but does believe an investor could get back more than they invested. She wants next year's Legislature to tighten up the credit, which she said could be a big blow to the state's already tight financial situation.

"If someone came in and claimed it, it'd be a huge blow to the budget," she said. "It would take us further into deficit spending."

This year, lawmakers rejected her call to curb the so-called Act 221 tax credits, approved in 2001 for high-technology research and development companies, which she said are too generous and could cost the state $55 million in revenues over the next two years.

"The longer we're here, the more we learn about some of the tax credits sitting on the books," she told reporters last week. "There is another one that is of big concern to us, and that's the ethanol plant tax credit. It's another one that is open-ended and uncapped."

The tax credit was approved in 2000 with the intent of stimulating ethanol plants to provide a fossil fuel alternative. The idea is to blend ethanol, a form of alcohol made from sugar cane wastes on Maui and Kauai along with other biomass such as municipal waste, with gasoline to produce a cleaner-burning fuel and reduce Hawaii's dependence on imported oil.

The law provides the credit for a maximum of eight years for facilities with a total investment of less than $50 million, and 10 years for facilities with more than a total $50 million investment.

The state Tax Review Commission's report to this year's Legislature highlighted the ethanol production facility tax credit as a particular problem.

"First, it is potentially a 240 percent refundable tax credit for the amount of investment," it said.

"For example, if a taxpayer invests $10 million in a 10 million-gallon ethanol production facility, the annual income tax credit under the statue is the lesser of 30 percent of the investment or $3 million for eight years, or a total credit of $24 million," the commission said. "In a world where a 10 percent credit is considered generous, this 240 percent credit might be considered unusually large."

Lingle said her administration has been contacted by interests looking at building ethanol plants.

"In the last month or so, we have heard from or met with three different entities who are looking at this ethanol tax credit. One is on Maui, one is on Kauai and one is here on Oahu," she said. "These are all companies or huis or individuals who have started down this road and they have met with us already, and they want to confirm that they can claim a 240 percent tax credit on an ethanol plant.

"We have made it clear to them that we just don't read the law the way they do, and they are going to have to go a long way to ever convince us of that," Lingle said.

The governor did not identify the groups expressing interest.

Lingle said the Legislature will be asked to review the ethanol tax credit that "needs to have loopholes closed and needs to become more focused on what we are all really trying to achieve rather than creating tax shelters."

Tax Foundation of Hawaii President Lowell Kalapa said Lingle appears to be learning more about tax credits than she knew when she was running for governor last year.

"During the campaign, she appeared to know it all and advocated the tax credits to stimulate the economy, but without really knowing what they were about," Kalapa said. "Now she's got those shoes on her feet, and they don't fit."

The Hawaii-based Worldwide Energy Group has proposed an ethanol plant at the Gay & Robinson sugar mill location on Kauai, producing between 12 million and 15 million gallons annually, while Hawaiian Commercial & Sugar Co. is planning a molasses-to-ethanol plant for Maui.

Meanwhile, the U.S. Senate approved a new mandate Thursday requiring ethanol to be used by gasoline refiners by 2012 in every state except Alaska and Hawaii.

State of Hawaii

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