Fashion designer Allison Izu Song has been running her clothing business for five years, and now she’s hoping to take it up a level.
The 37-year-old Song, whose Allison Izu label offers clothing for petite women, brought all her manufacturing to Hawaii from the mainland and Asia about two years ago.
But since returning to the state where she grew up, the entrepreneur has sometimes struggled to find the right machinery and a workforce with the skills to create garments that are more complicated than Aloha shirts.
Song’s company is one of about 1,000 businesses that make up Hawaii’s $8.8 billion manufacturing industry, a tiny slice of the state’s economy that advocates are hoping to broaden with the help of a tax credit proposal that is making its way through the Hawaii Legislature.
The Senate recently passed Senate Bill 3082, which would create an unspecified tax credit for employee training and equipment costs. (An early version of the bill put the credit at 20 percent.)
The Hawaii Food Industry Association and the Chamber of Commerce of Hawaii are among the organizations backing the idea because, they believe, it will help stimulate the industry and help Hawaii’s economy.
Sherry Menor-McNamara, CEO of the Chamber of Commerce of Hawaii, thinks manufacturing has potential. Already, the industry employs about 17,000 people. A tax credit might help many small businesses grow, she said.
But the manufacturing industry is just one of many groups jostling for the attention of lawmakers this session.
In advance of legislative “crossover” last week, the House and Senate collectively passed more than two-dozen bills creating or amending tax credits to benefit various industries.
In the wake of the Council on Revenues prediction on Tuesday that the state is expected to receive $180 million less revenue this year than initially anticipated, it’s unlikely that many of the tax credits will become a reality in 2014. But House Finance Committee Chairwoman Sylvia Luke said that despite the lowered economic forecast, the proposals are still up for discussion.
In addition to advocating for a bunch of new tax credits this year, lawmakers could also revisit some of the proposals that were considered last year, such as a tax credit to help teachers cover the cost of extra classroom supplies.
Targeted Economic Stimulus or Special Treatment?
Tax credits have been a popular way to stimulate Hawaii’s economy for years. In the past, the Legislature has created tax credits to encourage energy conservation, residential and hotel construction and the growth of various business sectors.
Last session, the Legislature passed a bill to increase tax credits for Hawaii’s film industry, hoping to attract more big-budget productions like “The Hunger Games” and “Forgetting Sarah Marshall.”
But critics say that the proposals end up favoring specific special interest groups at the expense of all Hawaii taxpayers.
The Tax Foundation of Hawaii, a nonprofit group that tracks all bills related to taxes and makes suggestions about tax policy in Hawaii, argues that such proposals are inherently unfair.
“Giving tax breaks to a select group of taxpayers comes at the expense of all other taxpayers,” the organization said in its testimony about the proposed tax credit aimed at stimulating manufacturing. “As such, it is an insult to all other taxpayers that they are not deserving of such tax preferences.”
That concern is echoed by two state agencies in their comments on Senate Bill 2322 and House Bill 1702, proposals that would establish a capital improvement tax credit to help tenants displaced by the state’s plan to redevelop some of its property at Honolulu Harbor.
The plan, known as the Kapalama Container Terminal Project, has been in the works for years but is still facing resistance from tenants like Pacific Shipyards International that are saddled with the high cost of relocation.
The tax credit proposal would subsidize the tenants for the cost of infrastructure upgrades. Sen. Michelle Kidani, who introduced a version of the measure, said it’s important for the state to help the businesses because they are being moved to a site that is essentially “one blob of cement.”
But the Department of Transportation said the bill would help only one tenant and the Department of Taxation has opposed the idea, saying that the bill’s wording is too loose and could lead to “substantial abuse.”
Some advocates for certain tax credits argue that while they might benefit a specific group, they are necessary to compensate for injustices in the state’s tax system.
The nonprofit Hawaii Appleseed Center for Law and Economic Justice is campaigning for several bills to provide tax relief for low-income people, contending that Hawaii’s tax policy disproportionately hurts poor people.
The organization’s main proposal is House Bill 2371, omnibus legislation that would, among other things, create a new low-income tax credit and update an existing tax credit for low-income renters.
Sen. David Ige, who leads the Senate money committee, said that he and other lawmakers want to provide some tax relief for Hawaii’s poor. But he added that Tuesday’s downgraded state revenues prediction will “significantly affect” which bills ultimately move forward.
“We do anticipate that it will be harder to accommodate tax credits not only in the current year but in the future years as well,” he said.
One problem with tax credits is that it’s not always clear how much the proposals will cost when lawmakers vote on them during the session or even after the law has been passed.
Because many tax credit measures don’t specify how big the credits will be until the budget is decided near the end of session, legislative committees frequently approve bills without knowing how much they’ll cost.
And even after tax credits become law, people can take advantage of unintended loopholes, forcing the state to spend a lot more than the Legislature anticipated.
Tom Yamachika, the interim president of the Tax Foundation of Hawaii, points to a 2001 law known as Act 221 as an example of tax credits gone awry. Act 221 created a tax credit to kick-start the technology industry in Hawaii. But lawmakers had to go back to amend it soon after it was created to “stop the bleeding” after it became clear that the state was losing too much money.
The way the law was written made it impossible to tell whether or not the tax credit was effective, according to a critical 2012 report by the state auditor.
Another loosely written law establishing a tax credit for solar energy systems allowed people to take advantage of the credit and charge the state for having more than one system on their roof. The state lost so much money that in 2012 Gov. Neil Abercrombie asked the state Department of Taxation to create new rules to close loopholes in the law.
Yamachika thinks lawmakers should consider other existing subsidies that the state offers, including a foreign trade zone option that allows certain businesses to delay paying taxes.
“At least you know how much they cost,” Yamachika said of those programs. “Compare and contrast that with the tax credits, you don’t know how much you are spending.”
But lawmakers maintain that tax credits can still be helpful because they can help to create jobs in high-earning industries.
Ige said that even though the solar energy system tax credits were too generous, they still allowed businesses to leverage state dollars to generate more economic activity than direct grants would have created.
“It is a balancing act in really trying to focus and understand what activity we’re encouraging,” he said.
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