Creative Districts 

by Tom Yamachika, President, Tax Foundation Hawaii

One of the more intriguing ideas to cross my desk recently is in Senate Bill 822.  It proposes to have certain sections of our state designated as “creative districts.”

The idea would be to gather artists, such as painters, photographers, and musicians; and cultural organizations, perhaps hula halau or ukulele schools, together in the area. 

The process, including designating the districts and certifying eligible “creative enterprises,” would be done or managed by the State Foundation on Culture and the Arts.  It appears to be patterned after a reportedly successful program undertaken by the State of Washington, which describes creative districts this way:

A Creative District is a fun place to live, work, and visit. It’s geographically defined area of cultural and economic activity. It’s the heart of a community. It is a place for people to gather and enjoy their community’s arts and culture.

A district is a place where innovation and creativity can thrive. A place that helps the community move enthusiastically into the future.

In the Senate bill, creative enterprises in a creative district would be eligible for tax credits.  The bill, however, is a little light on details.  It says that the credit for the first year would be __% of the income tax liability applicable to gross income from business activity within the district, in the second year it would be __%, and it continues until the fifth year, when the credit would be __%.  Both the bill as introduced, and the Senate Draft 1 from the Senate Transportation and Culture and the Arts Committee, exhibit the same percentages (or lack thereof).  They don’t even tell us if the percentages are supposed to be increasing or decreasing from one year to the next.

The bill also says that counties “may” enact incentives for creative districts, such as real property tax exemptions and expedited permit processing.  Such language always makes me cringe.  The real property tax is the counties’ kuleana, so they can enact exemptions or incentives if they want to whether or not the State says they “can.”  In fact, there’s a court case saying that even if the State says the county “must” provide an exemption, the county doesn’t have to.  Counties have rights too!

Anyway, back to SB 822.  This proposal has some resemblance to our existing Enterprise Zone program, which seems to have a more focused objective and incentives.  An Enterprise Zone is designated when it is an area of historically low employment.  Businesses joining the program commit to operating in the area and hiring people there.  Incentives, which include income tax credits, general excise tax exemptions, and unemployment tax breaks, are lost if the business fails to maintain its promised goals.  The incentives start off substantial, taper off over time, and go away after a while, seven years for most businesses.

What kind of tax incentives might be appropriate for a creative enterprise?  Given the stories about starving artists (many of which are based in fact, I understand), income tax credits might not be the best idea.  You need to have a net profit to owe income tax, and many creative enterprises run on thin margins.  Maybe a GET exemption would be a better choice because that tax needs to be paid when a business has any income at all, whether or not it is enough to pay necessary expenses.  A credit against unemployment tax might also be appropriate because the goal of the program is to have creative enterprises, and of course the people who make them work, physically located in the districts.  

As of this writing, the bill is still alive and kicking in the Senate.  Will it get to the finish line?  Maybe some lawmakers have a creative strategy in mind for it!