A special tax credit established to help relocate maritime tenants on the Honolulu waterfront is poised to be expanded and sweetened in ways that some observers estimate could cost the state $20 million in the years ahead.
With state lawmakers heading into the final days of the legislative session for this year, it remains uncertain how they might amend the tax credit law, but proposals have been floated to double the size of the credit that could be claimed by investors.
Supporters of House Bill 1167 and Senate Bill 676 have also asked lawmakers to expand the types of expenses that would qualify for the tax credit, which would make the credit easier to claim.
The tax credit was first approved by lawmakers last year, and is available to investors who finance the relocation of maritime tenants that are displaced by the state project to construct the new Kapalama Container Terminal at Honolulu Harbor. Only companies that are relocating to Piers 24 through 28 in Honolulu Harbor can qualify for the credit.
Leading the effort to expand the tax credit is Pacific Shipyards International, the state’s largest private ship repair company, and its subsidiaries Navatek Ltd. and Navatek Boat Builders. Pacific Shipyards is being displaced by the Kapalama terminal construction and is relocating to Piers 24 and 25.
"I’ll give them an ‘A’ for audacity," said state Rep. Marcus Oshiro, who was an outspoken opponent of the original tax credit last year.
Oshiro said lawmakers should reject any expansion of the credit, which he described as "special-interest legislation" that was "improvidently approved and endorsed by the current governor."
"Given the fiscal reality today and our inability to help the least among us, the poorest among us, who have gone years without any type of tax relief, I cannot stomach a bill like this being approved," he said.
Ann Chung, director of special projects for Navatek, said the original tax credit law that passed in 2014 and was signed into law by former Gov. Neil Abercrombie needed some "technical tweaking," which is why the shipbuilding firm returned to request changes from lawmakers this year. In particular, she said the wording that described the size of the credit was unclear.
"Some places said tax credit, some places said infrastructure cost and sometimes it wasn’t very clear," Chung said. "It’s just to clarify."
The original version of the bill introduced this year would have effectively doubled the maximum tax credit to up to $2.5 million per year from $1.25 million, but Chung said her company is not now asking for any increase in the dollar value of the credit.
"It was in the original draft, and it would have been nice but we’re not supporting it now," Chung said.
But the state Department of Taxation says proposals submitted for lawmakers’ consideration this year amount to "far more than a technical fix. The language both expands the property eligible for claiming the credit, and increases the amount of the credit," the department said in a written response to questions about the tax credit bills.
Chung testified to state lawmakers that Pacific Shipyards has operated a commercial ship repair facility in Honolulu Harbor for 70 years, and "our tax revenues and hundreds of high-paying jobs are important to Hawaii’s economy, maritime community and port security."
Pacific Shipyards is being required to relocate from Pier 41 to a state-owned site at Piers 24 and 25, moving from an existing 45,000-square-foot facility to empty piers without necessary infrastructure.
"Supporting the displaced waterfront tenants of the Kapalama Container Terminal project supports the growth of commerce in the state and supports maritime jobs," Chung said in her testimony.
Also supporting proposals to amend the tax credit law this year is Roberts Hawaii Inc., which must move its tour boat operations from Pier 41 to make way for the state’s Kapalama construction project.
Roberts currently does not qualify for the tax credit and is seeking changes in the law that would allow the company to qualify.
Currently the credit only applies to real property such as buildings and fixtures attached to real property, according to the Tax Department. However, the proposals now being considered by lawmakers would expand the credit to include any capital asset used in the business, which would include items such as machinery, computers, trailers, dry docks and tools, according to the Tax Department.
Tom Yamachika, president of The Tax Foundation of Hawaii, said the original tax credit bill approved last year seemed fair because it covered fixed assets that would stay with the property. Any permanent infrastructure that is installed by private tenants on the state-owned piers would become the property of the state when the tenants leave.
But the revised version now being considered would allow the credit to be used to offset the cost of purchasing machinery and equipment, Yamachika said.
Yamachika said that means the state is essentially helping to pay for equipment that the shipbuilder will own, and asked, "Why are we subsidizing their stuff?"
"There are lots of games being played to try to increase the amount of the credit quite dramatically," Yamachika said. "They are technical changes, but they have a lot of meaning."
The Tax Foundation warned lawmakers in testimony earlier this month that with the proposed changes in the tax credit law, "now it appears obvious that the revenue hit is going to be in excess of $20 million, although possibly spread over a number of years."
Oshiro (D, Wahiawa-Whitmore-Poamoho) said the tax credit for Kapalama maritime tenants was the only new tax credit established in 2014 in a year lawmakers refused to provide tax credits that would have benefited the working poor, low-income renters or seniors.
Oshiro, who is a former House Finance chairman, also said he believes the tax credit changes lawmakers are now considering could eventually cost the state $20 million in lost revenue.
That money would benefit the for-profit Pacific Shipyards, which already enjoys tax benefit under the existing state and federal tax codes, including the benefits of deductions and depreciation, he said.
"These folks need to be given credit where credit is due," Oshiro said of the supporters of the bill. "They’ve done a damn good job of lobbying and pitching their interests, and this is the textbook example of the finest lobbying effort I’ve seen in a long, long time."
Lawmakers are scheduled to meet in conference committee Wednesday to decide how to proceed with the tax credit proposals.
