Hawaii business bleeding after 2010 session - Pacific Business News (Honolulu):

Friday, May 7, 2010

PBN Analysis

Hawaii business bleeding after 2010 session

Pacific Business News (Honolulu) - by Linda Chiem Pacific Business News

The just-wrapped legislative session will leave a bad taste in the mouths of most business owners and investors as lawmakers scrambled to balance the state’s $1.2 billion budget deficit primarily by raising taxes and adding fees in a variety of areas.

Local business leaders stopped short of calling it one of the most brutal legislative sessions, but it was one where a cross-section of industries was asked to pay up or give up in the name of helping the state’s economic recovery.

Among the most bitter-tasting defeats were cutbacks to the once-lauded technology tax credit program and an increase in the barrel tax.

“The across-the-board tax increases, even with no general excise or personal income rate tax increase, just killed sectors of the business community,” Lowell Kalapa, executive director of the

Tax Foundation of Hawaii, told PBN. “The high-tech [sector] didn’t like their credits being suspended, or seeing Act 221 terminated earlier, and other sectors contributed to close that gap in the state budget. Everybody was asked to give up something.”

Gov. Linda Lingle last week vetoed the barrel tax bill, saying it would cost Hawaii residents and businesses $22 million in new taxes every year and make virtually everything more expensive. But state lawmakers quickly overrode her veto, paving the way for the state to collect $1.05 per barrel on imported petroleum products, up from the current 5 cents, to help balance its budget.

Consumers also will end up paying more in the form of higher prices on goods and services.

“Yes, businesses will pay more for gasoline and for electricity, but even that will be passed on to consumers eventually in the form of higher prices,” said Carl Bonham, an economist with the

University of Hawaii Economic Research Organization. “Note that this tax hits everyone, but clearly hits heavy energy users the hardest.”

Kalapa said the barrel tax lacks accountability, and lawmakers should have considered other avenues, such as raising taxes and fees on motorists, for plugging the budget hole.

“People will not know why the cost of living increases, and what is unfortunate is where lawmakers tried to avoid [raising fees for motorists] because it’s an election year,” he said. “It will make the cost of doing business here more expensive. Instead of helping economic recovery, it’s going to stall it even longer. As the costs of good and services become more of an imposition, small businesses can’t recapture the costs as efficiently like [big-box retailers] and they cannot spread those cents over more items.”

Meanwhile, particularly harmful to future economic development in Hawaii’s science and technology sector is legislation that abolishes a package of tax credits known as Act 221, seven months earlier than the scheduled Dec. 31 sunset date. Another measure suspends until 2013 taxpayers’ and investors’ ability to claim tax credits for investments they already have made in Hawaii businesses.

Dustin Shindo, founder of

Hoku Corp., which benefited from Act 221, called the legislation a “significant blow to the high-tech community and entrepreneurs in Hawaii.”

“It will make it difficult to fund new companies in Hawaii,” he told PBN last week. “Pushing back the tax credit to 2013 undermines the credibility of Hawaii as being a trustworthy place to do business.”

John Knorek, an employment attorney and chairman of the board of directors for The

Chamber of Commerce of Hawaii, called it a setback.

“When you make a representation to do something or invest in something, then change the rules of the game after the fact, it’s probably the worst thing for business to have to deal with the consequence,” he said. “It isn’t just the individuals that are affected, but now it’s how that’s going to play out in the future and the needs to find outside investment in order to grow. We need to keep capital for the state, provide the jobs for people and be vigilant in protecting or creating an environment to come to Hawaii, so this is a bit of a setback.”

Both measures are still being reviewed by Lingle.

But business got some much-needed help in the form of fast-tracked legislation that gradually resets unemployment insurance tax increases for employers rather than hit them with what would have been ten-fold payroll tax hikes this year.

“Our primary objective was to mitigate the unemployment tax increase and, in my lifespan over at the Legislature, this was an unprecedented and cooperative effort between the House, Senate, the administration, the chamber and the business community,” Knorek said. “This was fast-tracked legislation that actually assisted business with the recognition that we’re in tough times. Overall, [lawmakers] were very aware of the unbelievable difficulty they had, and what the business community was facing and where they wound up, in large measure, was acceptable for the business community.”

Legislation’s impact on business
• Act 2 (House Bill 2169):
Unemployment insurance tax bill
Fast-tracked legislation that gradually resets the payroll taxes paid by Hawaii employers, who have been enjoying a payroll tax holiday for the past two years, and replenish the state’s unemployment fund.
Why it’s good for business: It cut Hawaii employers a break from what would have been a nearly ten-fold surge in their unemployment taxes set to kick in mid-April.
• The end of Furlough Fridays
This is good news with a potential downside. The state has agreed to shift $67 million from the Hurricane Relief fund to get rid of 17 furlough days during the 2010-11 school year.
Why it’s good for business: We have to show the world and prove to ourselves that there is nothing more important to our economic future than giving our kids the opportunities only afforded by education. At the same time, taking the money from the Hurricane Relief Fund is a gamble on the weather that could have dire consequences to local businesses if this is the year we suffer a direct hit.

• Act 73 (House Bill 2421):
The barrel tax bill
Raises the tax on petroleum products from 5 cents to $1.05 per barrel. The increased tax is expected to generate about $33 million a year and originally was intended to finance food and energy security programs and grants in aid that would support energy independence in Hawaii. But a last-minute provision inserted by lawmakers now diverts 60 percent of that money (approximately $22 million a year) to the general fund to help close the state’s budget deficit.
Why it’s bad for business: It guarantees price increases for gas and electricity, driving up the cost of living and the cost of doing business in Hawaii as consumers likely will end up seeing the taxes passed on to them in the form of higher-priced goods and services.
• Senate Bills 2001 & 2401
SB 2001 abolishes a package of tax credits known as Act 221 for high-technology investors seven months earlier than its original expiration date of Dec. 31, while SB 2401 suspends for three years tax credits that already were promised to current investors.
The two measures come on the heels of changes made to Act 221 last year. Lawmakers established an 80 percent tax credit cap — meaning investors were now limited to deducting 80 percent of their investment over five years. It also restricted investors without Hawaii tax liability from transferring their credits to Hawaii-based investors, typically in exchange for more equity in the tech company.
In its original form, Act 221 offered a 100 percent credit against state tax liability for cash investments up to $2 million in qualified Hawaii tech companies. The return was designed to be front-loaded over five years.
Why it’s bad for business: It punishes investors who have already put money into developing Hawaii’s high-technology sector and deters any future investment for the sake of balancing the state budget.
• Act 68 (Senate Bill 2840): “The local jobs for local people bill”
Requires at least 80 percent of workers on any state or county public works contract to be Hawaii residents. Contractors who violate this face sanctions that include temporary suspension of the contract, withheld payments, disqualification from the project, recovery of contract payments, and disbarment or suspension.
Why it’s bad for business: It creates what some have called an ambiguous layer of contract compliance and an added burden on general contractors and their subcontractors to track the hours.
• Act 59 (House Bill 1985): Taxation; Political Contribution; Insurance Fees
Repeals the deduction from taxable income for amounts given as political contributions effective Jan. 1; increases the tax on cigarettes and little cigars by 1 cent for sales on or after July 1; doubles certain insurance fees and specifies that the increased fees be deposited equally into the compliance resolution fund and the general fund as an insurance license and service tax effective July 1.
Why it’s bad for business: Insurance companies, agents, brokers and adjusters will have to pay higher fees and consumers may see those costs passed on to them in the form of higher insurance premiums.
•Act 22 (House Bill 2600): Tax Administration; Tax Due Dates
Pushes up the due dates for miscellaneous tax types from the last day of the month to the 20th day of the month to conform with the general excise tax payment deadline. Changes the due date for filing and payment of quarterly periodic insurance premiums taxes from quarterly to monthly.
Why it’s bad for business: It causes administrative headaches and will be costly to adjust internal systems to meet the new filing deadline.


• House Bill 2877 was an attempt to temporarily raise the state general excise tax by one percentage point between Oct. 1, 2010, and Sept. 30, 2012, to generate an extra $458 million a year in revenue for the state, again, to balance its budget.
The measure didn’t survive the session after lawmakers determined that a G.E.T. increase, which applies to all goods and services sold in the state, would further set back the state’s economic recovery.

lchiem@bizjournals.com | 955-8042

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