Hawaiian Airlines and other air carriers should expect some pointed questions next year from lawmakers about some long-standing state tax exemptions that are costing the state millions of dollars a year in lost tax collections.
The airline tax exemptions were approved in 1997 and 2001 in an extremely competitive era for interisland travel, when Hawaiian and Aloha Airlines were each struggling to survive.
Hawaiian filed for bankruptcy protection in 1993 and emerged from reorganization in 1994 but was back in bankruptcy in 2003. Aloha filed for bankruptcy in 2004, emerged from bankruptcy protection in 2006 but filed for bankruptcy again in 2008 before finally halting its passenger operations for good later that year.
Lawmakers provided tax relief to the airlines in the form of an excise tax exemption in 1997 for payments for the servicing and maintenance of aircraft, or for the construction of aircraft service and maintenance facilities in Hawaii. They also established another excise tax exemption in 2001, known as Act 210, for payments on leased aircraft and leased aircraft engines.
Today Hawaiian Airlines is the overwhelmingly dominant interisland air carrier, but the tax exemptions remain on the books.
The Act 210 exemption for lease payments alone saves Hawaiian an estimated $4 million to $5 million per year, according to Hawaiian spokesman Alex Da Silva.
Da Silva said that because of the short Thanksgiving week holiday work schedule, airline officials were unable to immediately calculate Hawaiian’s annual savings from the 1997 tax exemption that applies to spending on aircraft maintenance. It would take time to determine that savings because much of the airline’s maintenance is done at facilities on the mainland and in New Zealand, he said.
Some lawmakers are wondering whether the tax breaks still make sense now that Hawaiian dominates the interisland market. House Finance Chairwoman Sylvia Luke said she plans to discuss the issue with the state Department of Taxation, meet with industry officials and introduce legislation to stimulate discussion on that and other state tax breaks.
In the case of the leased aircraft exemption, “what is the purpose, and what is it helping; and is it just going to their bottom line, or is it helping the state in some way?” asked Luke (D, Punchbowl-Pauoa- Nuuanu). “Of course, we want a viable interisland airline, but what are we trying to accomplish with this tax credit or tax exemption?”
Law meant to level playing field
Da Silva said in an emailed statement that the airline leases 25 of its 52 aircraft and six engines, which means the airline saves $4 million to $5 million a year because of the state excise tax exemption.
“This legislation created a level playing field for all Hawaii-based carriers that would otherwise be at a disadvantage when competing with other airlines that fly in to Hawaii but are exempt from this tax,” Da Silva said of the exemption. Other states that are home to airlines also exempt aircraft leases from sales taxes, “so this exemption was justified as a way to allow Hawaii-based carriers to compete on a level playing field with out-of-state carriers,” he said.
“We believe all airlines servicing Hawaii and operating in a free marketplace should be held to the same tax standards,” Da Silva said in his statement. “Hawaii’s Act 210 was an attempt to match similar aircraft tax regulations provided by other states to hometown carriers, including California, Texas, Georgia and Illinois.”
Those states also waive their taxes on aircraft leases, “and in some cases they do more,” Da Silva said.
Senate Ways and Means Chairwoman Jill Tokuda said the state needs to do systematic, periodic reviews of all tax credits and exemptions. She cited both Act 210 and the 1997 law exempting payments for the servicing and maintenance of aircraft from the state excise tax.
“Has it had a review in recent years? Have we even had an assessment of what the fiscal impact has been in recent years?” asked Tokuda (D, Kailua-Kaneohe). “I think it does warrant a further discussion in terms of, is this credit even necessary? Should we be continuing it? Does it need to be amended; is it still meeting its original intent and mandate? Is it appropriate? Who is actually benefiting from it? Are we tracking it?”
Tokuda said the state Tax Department is unable to clearly state how much the state gains or loses from each tax break, which makes it all the more urgent that the Tax Department modernize its information technology systems.
“We don’t have a good accounting, and that’s the problem, quite frankly, that I see,” Tokuda said.
Newer tax breaks have caps
Luke said the Tax Department has also been unable to do a cost-benefit analysis for state lawmakers of the airline exemption or similar tax incentives or credits. That means lawmakers “don’t really know what the specific benefit of tax credits are or if it just goes to shareholders or the corporate bottom line,” she said.
In recent years lawmakers have responded to that lack of tax analysis by requiring that new tax breaks either terminate on a specific date or are capped to limit the total dollar amount of tax benefit that businesses statewide can claim, Luke said.
Tokuda said lawmakers are requiring the Tax Department in the years ahead to generate regular reports on all tax credits and exemptions. Lawmakers are also considering calling on the state auditor to conduct similar reviews, she said. “While we’re waiting for tax modernization to catch up, we’ve got to have some other kind of stopgap measure in place so that we know what’s going in and what’s going out in terms of revenues, because right now clearly we just don’t have a good enough handle on these exemptions and credits, and that’s not acceptable.”
Luke said lawmakers are sometimes criticized for providing corporate tax breaks that don’t seem to accomplish much because they don’t appear to change the behavior of the businesses that benefit them. For example, some have argued that state tax breaks made to encourage hotel renovations or promote solar power development were a waste of money because those industries would have done those things anyway.
“We’ve heard those arguments, so we want to make sure that if we provide any taxpayer money for a specific industry or for a cause, we want to make sure that it’s directed to what it was supposed to lead to,” said Luke. “This is kind of a good example for us to evaluate all tax credits and exemptions.”
