Private investment firm Ulupono Initiative lost a lot of money on its recently aborted plan to establish a dairy on Kauai, but so did local taxpayers thanks to a tax credit crafted by state lawmakers.

Honolulu-based Ulupono received $875,000 in state tax credits under a 2008 law that created incentives for landowners to preserve prime farmland for agricultural use in perpetuity.

Ulupono, owned by billionaire eBay founder Pierre Omidyar, qualified for the tax credit by investing in an agricultural operation on land it leased from another company that had its property preserved under Hawaii’s Important Agricultural Lands, or IAL, law.

Critics of tax-credit incentives said the result with Ulupono’s Hawaii Dairy Farms shows why such incentives amount to bad policy, given that the state gave up tax revenue that benefited a billionaire with a project that failed.

“It was kind of the worst-case scenario for pick-a-winner tax policy,” said local economist Paul Brewbaker of TZ Economics. “There is no dairy. Unfortunately, the state is left holding part of the bag.”

Over the years, other tax credits created by the Legislature have cost the state revenue while falling short of intended benefits.

In 2003, tax credits created for developing a “world-class” aquarium at Ko Olina Resort and Marina were partially claimed with no resulting aquarium. Another example was a 2001 tax credit program for high-technology industry investments that benefited companies that went bankrupt or left the state.

Local community watchdog Carroll Cox expressed concern that the IAL tax credits weren’t tied to agricultural production instead of spending. “They didn’t produce any milk,” he said of Ulupono. “We have great concern as would any taxpayer.”

Tom Yamachika, president of the nonprofit Tax Foundation of Hawaii, said tax credits with broad applicability make it harder to tailor results because you don’t know who will apply or under what circumstances.

“It’s kind of like opening the floodgates,” he said. “That’s part of the risk that lawmakers take with our money.”

When the IAL bill was being debated at the Legislature, the Tax Foundation said in written testimony that the tax system isn’t an efficient way to encourage use of important agricultural lands, and that it would be poor policy to have tax credits granted regardless of a taxpayer’s need for relief.

“If the intent of lawmakers is to pay for such investments out of the public treasury, then an appropriation of public funds is more appropriate,” the foundation said. “A specific appropriation would have to compete with all other demands on the public treasury and would have to undergo the scrutiny of lawmakers as they set priorities for the state’s limited resources.”

The intent of the IAL bill was to provide incentives and protections “to establish and sustain viable agricultural operations on important agricultural lands.”

The bill established a package of benefits that included provisions for worker housing, loan guarantees, expedited processing facility permits and allowing a landowner to convert 15 percent of its protected lands for urban or other uses. Landowners that protected at least half their farmland holdings also foreclosed the ability for counties to place the balance into protective status.

According to state Department of Agriculture reports to the Legislature, the department certified about $4 million in IAL tax credits from 2013 to 2017. Last year lawmakers extended a sunset date for the incentives to 2021.

The reports don’t say who claimed credits, though recipients include Alexander &Baldwin Inc., which in December sold its IAL land on Maui for $262 million, and Parker Ranch.

Under the law, up to $7.5 million in tax credits may be issued annually, and applicants can claim credits for 50 percent of qualified investments up to a maximum $1 million credit payable over three years or longer. The credit also is refundable, meaning the credit can be paid as cash to a taxpayer that doesn’t owe enough in taxes.

Grove Farm Co., a former sugar cane plantation operator now owned by another billionaire, America Online co-founder Steve Case, had 11,000 acres on Kauai designated IAL under the law, including 557 acres leased to Ulupono.

Ulupono claimed in 2014 that $3.2 million it invested in the dairy plan qualified for tax credits. The spending covered water infrastructure, feasibility studies, processing facilities, regulatory expenses and roads or utilities.

Omidyar’s firm was granted $625,000 in 2014 and $250,000 the following year. However, the Department of Agriculture said Ulupono didn’t claim the $125,000 balance of its $1 million maximum in subsequent years. Under the law, Ulupono could still claim the balance. The law also has no provision for returning credits that don’t result in viable agricultural operations.

In a written statement, Ulupono said it is disappointed that Hawaii Dairy Farms didn’t succeed but that the tax credit program provided an incentive to take on risk with the project it estimated would cost $17.5 million.

Ulupono scuttled the farm plan in January after a legal challenge by community members and regulatory difficulties largely over risks that the facility would pose a wastewater pollution hazard from storing liquefied manure in open ponds for use as pasture fertilizer.

The investment firm auctioned off equipment including irrigation supplies, tractors and water troughs. An unassembled $750,000 steel barn didn’t sell. The company said it is working with Grove and others to explore alternative proposals for food production on the site, and that tax credit proceeds get reinvested back into work it does to support the community.