Help Wanted - Hawaii's Economic Crisis

The state government has been
slow to offer the kinds of tax breaks and
other incentives that other states use
to attract spending and growth

By Craig T. Kojima, Star-Bulletin

When government offers business a hand ...

Project: Continental Airlines' $24 million jet maintenance hangar.
Incentive:$2 million in tax breaks; 30-year lease on Lagoon Drive parcel, $25 million to $30 million in bonds to finance construction at low interest rates.
Action:Passed by Legislature, allowing Hawaii to outbid two other locales for the project.
Anticipated payoff: More than 200 jobs, plus $500,000 in annual state tax revenue.

By Craig T. Kojima, Star-Bulletin

... and when it doesn't

Project: Victoria Ward Ltd.'s Kakaako retail project.
Proposed incentive: $60 million bond-refinancing plan to build a parking lot.
Action: Killed by Senate budget negotiators who were afraid the state would end up repaying the bonds in case of a default.
Result: A six-month to one-year delay in the project.

Bad connection

VeriFone's experience illustrates
the mixed signals given to businesses

By Rick Daysog

When VeriFone Inc. was looking to open a manufacturing plant in Honolulu about seven years ago, it approached the Waihee administration and a top city official for tax incentives.

Fat chance.

Waihee declined, while the city official asked VeriFone's banker for a job for one of his sons, according to a source familiar with talks.

VeriFone -- a 3,000-employee high-tech company founded in Hawaii but now based in Redwood City, Calif. -- opened a factory in Taiwan instead of Honolulu. VeriFone now operates two factories in Taiwan, employing 950 workers.

In many ways, VeriFone's experience underscores a long-held perception that Hawaii is hostile to business -- a perception that has handcuffed the state's ability to attract mainland and foreign companies and revive the isle's moribund economy.

While states like Tennessee, Georgia and Indiana have courted foreign investment and out-of-state employers with multimillion-dollar sweeteners, Hawaii has offered little until recently.

"The VeriFone story was (told) all over the nation, and there is no way that you can undo that," said David Ramsour, a local economic consultant. "The word spreads very fast that Hawaii is a difficult, if not adversarial, place to do business."

Playing the incentive game

That negative perception is what Gov. Ben Cayetano is battling in his campaign to attract businesses and investments.

With Hawaii's economy stuck in its worst slump since statehood, Cayetano is making a sharp departure from his predecessors by proposing tax incentives and other inducements to businesses with strong ties to Hawaii's tourism market. They include airlines, a shopping center developer, filmmakers as well as engineering and architecture firms for their overseas work.

While Cayetano isn't betting the farm as other states have, his use of incentives signals a quantum shift in the government's attitude to the business community.

One of those tax breaks helped snag Continental Airlines Inc.'s planned $24 million jumbo-jet maintenance hangar. The administration outbid Guam and Saipan for the 112,000-square-foot, 10-story-tall complex by offering about $2 million in tax breaks along with a 30-year lease on a Lagoon Drive parcel and $25 million to $30 million in revenue bonds to finance construction at low interest rates.

What do you think?

The payoff? According to the state, the hangar will employ 110 aviation mechanics and will indirectly create another 100 jobs. It also will generate nearly $500,000 a year in state tax revenues.

The state also hopes to create additional jobs in Hawaii's film industry and promote the visitor industry by offering tax credits for movie and television productions that are shot here.

"These are opportunities that we should seize upon," said Joseph Blanco, executive assistant to Cayetano. "We are not giving away money out of our pockets. We're getting it back ... and more."

But to play the incentive game, Hawaii must enter a crowded arena. Ted Levine, chairman of Development Counselors International, an economic development firm in New York, noted that Hawaii faces competition from about 12,000 economic groups -- from local chambers of commerce to state agencies -- that are luring businesses regularly on the mainland.

Those 12,000 groups, in turn, are vying for roughly 1,200 major corporations that are looking to relocate or expand each year. That means a company considering relocation or opening a new plant receives an average of 10 sales pitches, Levine said.

Economic development experts contend that incentives are an integral part of attracting businesses these days. They range from flat-out subsidies to sales or property tax exemptions to bond issues to below-market rents on state and county properties.

And incentives aren't restricted to attracting manufacturers. The city of Denver has offered some $24 million in tax incentives for a planned $101.5 million retail/entertainment center in the city's downtown district.

The project, known as the Denver Pavilions, will be developed by Westlake Village, Calif.-based Entertainment Development Group and will be anchored by Nike Town and a Virgin record store. The project will add hundreds of jobs and will help revitalize downtown Denver.

"These are the rules of the game," said Susan Tolchin, professor of public administration at George Washington University and co-author of a book on foreign investment titled "Buying into America."

"Every state and every local government accepts the fact that money is global and they have to compete to keep up," she said.

The old way: Impact fees

Ironically, local state and county officials' reluctance to grant tax incentives was largely an outgrowth of the booming economy or "bubble economy" of the late 1980s and early 1990s.

With business so good in Hawaii, city officials weren't looking to pay companies to come in, they were looking to charge multimillion-dollar "impact fees" to deep-pocketed foreign investors. Some state agencies have required developers to pick up costs for new school construction, build affordable housing or build industrial space.

Even today, tax incentives remain a tough sell to isle lawmakers faced with a lean state budget. While the Legislature passed tax incentives for Continental Airlines and filmmakers this year, it failed to approve the administration's $60 million bond financing plan for Victoria Ward Ltd.'s Kakaako retail project.

The bonds, which would finance a 4,500-stall parking lot, were scuttled by Senate budget negotiators who were concerned that the state may end up paying for the bonds if there was a default.

Victoria Ward executives, who estimated the project would add as many as 1,700 retail jobs and 1,650 construction jobs, have said the bonds would be paid for by the project and would be backed by bond insurance and partner Indianapolis-based Simon DeBartolo Group Inc.'s assets. They say the lack of financing will delay the project by six months to a year.

More than one solution

Not all are convinced that tax incentives work.

Jim Mak, University of Hawaii economics professor, noted that tax incentives often aren't the determining factor in an employer's decision to relocate or expand. Mak said that employers place more emphasis on the quality of a state's or city's labor pool, their education system and their proximity to the markets where they sell their products.

"The record is not one of great successes," said Mak. "If anything, (governments) have botched things up."

Cayetano concedes that tax incentives don't always work.

He noted that the state has given tax breaks to the cruise-ship industry for about a decade now, with mixed results. But in cases like the Continental hangar, where the state was bidding against Guam, they pushed the odds in Hawaii's favor, he said.

Lowell Kalapa, executive director of the Tax Foundation of Hawaii, says tax incentives may be attractive to mainland companies over the short term, but unless government improves the long-term business environment, businesses won't come to Hawaii.

The state's heavy tax burden, restrictive zoning laws and the high cost of local goods and services make it difficult for any business to survive, much less thrive. What's more, many of the companies who relocate here end up paying the same high costs for goods and services that we do, Kalapa said.

"The productivity is short-lived," Kalapa said. "You may heal the sore, but the cancer is still in the body."

Sometimes, it's just 'executive whimsy'

Video game maker Square USA asked its workers where they would like to be based.

Their top answer: Hawaii.

So the company, attracted by the island weather, culture and other attributes, opened an office here. Period. The state didn't have to dangle free land, reduced rents or years of tax exemptions as a lure.

"They find this environment so perfect," said Seiji Naya, the state's point man on the economy.

While experts debate the effectiveness of incentives in attracting companies, the fact remains that most firms come to Hawaii because a top executive wants an office here or wants to live here, say some economic development officials.

"Executive whimsy is 90 percent of why we get the companies," said Bernice Bowers, executive director of the Oahu Economic Development Board.

Still, Bowers and others say the state needs to offer incentives to lure companies in selected industries that might otherwise not come here.

How has the slump affected you?

Shawn Dean, Part-time lifeguard

"The downturn in the economy is affecting me, big time. Before I became a lifeguard, I used to be a landscaper two years ago making $17 an hour. Now a lot of jobs -- the same type, even with experience -- I'd be lucky to get $10. A lot of things I see in the newspaper requiring two years of experience offer $8.30 an hour. That's almost half what someone could earn a few years ago.

"Well, the economy put my fiancee back to school. She wants to become a nurse because she knows it would be steady employment. She actually graduated and has a bachelor's degree in graphic art, but she couldn't find a job in Hawaii doing that. The only way to find a job was to move to the mainland, and we both decided we didn't want to live there. Therefore, we had to move. We had to live at home so she can work part time. Otherwise, we wouldn't have been able to afford our own place, like previously when we were living on Maui.

"The cost of living is higher. It costs more to eat in nowadays than even at some restaurants. My car's unregistered and sitting waiting to be sold because I haven't had the money to do it. I was supposed to go for a job interview on the Big Island, but I couldn't afford the trip."

Dubious Distinction

Honolulu ranked as the
second most expensive city (behind New York)
in a cost-of-living comparison
of 99 U.S. cities.

Source: American Chambers of Commerce
Research Association

Wanted: Your comments
What needs to be done to help Hawaii emerge from
its prolonged slump? Write to us at Letters to the
Editor/Economy, P.O. Box 3080, Honolulu, HI 96802
or e-mail us at and share
your suggestions. Please include your
daytime telephone number.

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