Editor’s note: This is the third in a series of stories that looks closely at specific issues facing Hawaii and how the Democratic gubernatorial candidates would deal with them. Also coming this week, Civil Beat teamed up with Hawaii News Now for in-depth interviews with the top candidates for governor in both the Democratic and Republican primaries. Civil Beat will be posting the full interviews on our Governor Race election page, which is where you can find all our coverage of the run-up to the primary.

The frightening tourism shutdown at the outset of the pandemic underscored the risks of Hawaii’s deep dependence on the visitor industry, and Vicky Cayetano is proposing a dramatic tax cut for small businesses as her most important strategy for finally diversifying the state economy.

Lt. Gov. Josh Green, meanwhile, wants to use government subsidies to grow local agriculture, including property tax breaks, direct grants to farmers for infrastructure, and tax holidays for startups until they become profitable.

Civil Beat asked the leading Democratic candidates for governor about their near-term, highest-priority initiatives for diversifying the economy, and Green and Cayetano responded with those ideas.

U.S. Rep. Kai Kahele, another top contender in the Democratic primary, declined to be interviewed for this series, saying through a spokesman he is dissatisfied with the way Civil Beat has covered the governor’s race.

Diversifying the state economy has been a talking point for politicians for decades as the tourism industry grew to 10 million visitors a year, and as the state economy has become increasingly dependent on it.

Cayetano, a longtime, successful Hawaii businesswoman, said Hawaii’s small businesses took an awful beating during the pandemic, and “they desperately need help.” She is suggesting the state halve the excise tax 0n companies with annual gross revenue of $5 million or less, and says that tax break should be permanent.

Grand opening sign likely didn’t happen during COVID-19 pandemic. Shuttered business along King Street now with ‘Available’ for lease. September 15, 2020
Storefront space is offered up for lease at a shuttered business on King Street in the fall of 2020. Vicky Cayetano says the pandemic has pummeled small businesses in Hawaii, and she wants to cut the excise tax on small businesses statewide by 50%. Cory Lum/Civil Beat/2020

“If you look around, almost every day you’re reading about another business going under,” she said. “When there isn’t a balance between local, family-owned small businesses and large big box retailers, it really doesn’t do service in the long run to the residents.”

The excise tax at the retail level is now 4.5% in Honolulu, Kauai and Hawaii counties, and 4% in Maui County. The state received nearly $4 billion from that tax last fiscal year — more than 40% of the state’s total general fund tax collections — which makes it critically important to financing state government operations.

Cayetano is running as a Democrat, but was a Republican before she married former Gov. Ben Cayetano in 1997, and her tax cut idea sounds a bit like a Republican proposal. But she rejects any attempt to put a partisan label on it, saying it would be good for everyone.

When asked how she would sell it to the heavily Democratic Legislature, Cayetano replied: “I believe when you tell the story and let them understand what’s at risk, they will be supportive.”

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“If we keep the small business community alive and thriving, it benefits everyone. So, to give them a tax break is better than to not have any revenue from them when they go under,” she said.

Cayetano conceded that her proposal is partly defensive — it seeks to support businesses that are already here — but said attracting new businesses or growing existing businesses requires a “business friendly culture,” and her tax cut would be a start.

“It’s so difficult to start a business today, it really is, and so if we want a diversified economy, we’ve got to look at the culture that we have, and Hawaii is not known for a business-friendly culture to begin with,” she said. “We all know that, but nobody’s talking about it.”

But the excise tax break Cayetano is proposing presents practical as well as political problems. For example, staff at the Department of Taxation say the state would not know if a particular business qualified for Cayetano’s 50% excise tax break until the business files a tax return at the end of the year showing it had less than $5 million in revenue.

By then the customers at that business would have already paid the full tax, which is arguably unfair. It seems likely the owner of a business that qualifies for the tax break would then keep as profit half of the money the business collected as taxes.

Paul Brewbaker, economist with TZ Economics, said another problem is the Hawaii state constitution requires a balanced budget, which means Cayetano’s plan would either force the state to cut spending, or the lost excise tax revenue would have to be made up with a tax increase somewhere else.

Supporters of tax cuts sometimes claim tax cuts stimulate so much economic growth that all of the lost tax revenue can be recovered through a surge of new business activity, “but that math never works out,” Brewbaker said. He said the “rule of thumb” is that the growth stimulated by a $100 million tax cut generates just $20 million in new tax collections.

Green’s answer to diversifying the economy is to grow the agricultural and energy sectors, including targeted subsidies and tax credits for agriculture. He specifically mentioned tax credits for taro farming, and for people who are interested in restoring or operating traditional fish ponds.

“We do have agriculture and we do have energy leaders in Hawaii, it’s just that they haven’t been supported enough to get off the ground fully,” he said. “To diversify we will have to support it, and that does mean tax credits to support land use.”

During the 2008 economic slump, Mari’s Gardens in Mililani converted part of its ornamental landscaping business into a hydroponic vegetable farm. Lt. Gov. Josh Green wants to diversify the economy by providing a variety of government subsidies and tax breaks to agricultural operations. Courtesy: Mari's Gardens/2021

Green wants to help farmers with infrastructure such as large greenhouses, which he said can cost $1.5 million each and may be out of reach for start-up enterprises.

He also believes that housing for agricultural workers will be key, because without housing the industry may not be able to attract the workforce it needs. He raised the possibility of tax credits for people who build agricultural housing on productive ag lands.

The government backing that Green envisions would include property tax breaks, direct grants to support investment in agriculture, and tax credits based on productivity, meaning the state would not tax operations until they become productive. He also would consider “tax holidays” for operations that create jobs in Hawaii.

“For large investments that commit to employing local workers, we want to support them until they’re profitable,” he said.

Farmers in Hawaii have struggled to compete for years in part because of high land, labor, transportation and other costs, but Green remains confident niche agriculture can still be profitable. In particular, he cited successful hemp and medical marijuana farming in other states, which he says is “very possible for us.”

Hawaii farmers have been calling for more investment in agriculture, but some are skeptical that is a promising route to take to diversify the state’s economy.

Brewbaker said large-scale farming outside of Hawaii has become vastly more efficient, making it extraordinarily difficult for Hawaii farmers to compete. That helps explain why employment in agriculture in Hawaii has dropped from 60% of the workforce a century ago to less than 1% today,

“The experience of the last several generations since statehood has been that no matter what you do — whether it’s orchids, of course sugar and pineapple, but even in the plant-breeding industry — eventually somebody will figure out a way to do it somewhere where either the labor’s cheaper, or the land is cheaper, or there’s more of both,” he said.

He said there is potential in high-value, niche markets, “but all of the actual farmers, all of the actual ranchers will tell you, it’s really hard to make money, and then those (thieves) come in and steal my crop right before harvest,” he said.

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