A Dirty Problem

by Tom Yamachika, President, Tax Foundation Hawaii

We’ve long had a dirty problem here in Hawaii.  A number of homes here are not serviced by a sewer system.  Instead, waste goes into a cesspool in the ground, and every so often the homeowner calls up a friendly neighborhood pumping service to pump it out and get rid of the contents.

This, of course, is not the healthiest state of affairs.  According to one Civil Beat essayist, we have “some 88,000 cesspools across the state that discharge 53 million gallons of untreated sewage into our groundwaters each day. This sewage pollution poses harmful threats to public health, drinking water, the near-shore environment and coral reefs, along with Hawaii’s reputation as a world-class destination.”

So, in 2017, our lawmakers enacted Act 125, which says that every cesspool in the State, except for those exempted by the Health Department, needs to be converted to an approved wastewater system or connected to a sewer system by January 1, 2050.

Now, then, how do we motivate the people who use cesspools to do the conversion?  Conversions like this aren’t cheap.

In 2015, lawmakers passed Act 120, which provided for a tax credit of up to $10,000 per cesspool converted.  That credit was available for calendar years 2016 through 2020, and then sunset.

In 2022, lawmakers tried a different approach in Act 153.  Instead of providing for  a tax credit, they gave a few million dollars to the Department of Health for a grant program.  People who intended to do a cesspool conversion could apply for the money up front, and then would receive reimbursement funds once the conversion took place and proper documentation was submitted.

In both cases, homeowners had to front the cash to pay the folks who would be designing and building the conversion.  How did the two programs compare?

KITV reported that from 2016 to 2020, there were only 200 homeowners who took advantage of the tax credits.

And what about the grant program?  "We received over 200 applications in the first three days of opening of the grant program. The response is way better than the income tax credit program," Sina Pruder, Dept. of Health Environmental Health Branch Manager, is quoted as saying.

So, let’s get this straight, five years’ worth of tax credit applications produced the same number as the first three days of the grant program.

Here at the Tax Foundation, we have been trying for several years to convince lawmakers that subsidy or grant programs are much better than tax credit programs.  For tax credit programs, we have been saying, lawmakers have to write up criteria and then have to pay anyone who meets the criteria, after the fact, even if the criteria didn’t accurately specify what lawmakers had in mind.  It’s like the five blind monks trying to describe an elephant.  Lawmakers probably don’t have problems with cesspools themselves but need to write the criteria for a good cesspool conversion.  Thus, with tax credits lawmakers probably don’t know what they are spending, because they haven’t much of an idea of how many applicants will come in, and they don’t know what they are buying for that money.  With a subsidy or grant program, the amount of the program is usually set – this one was $5 million – and the government folks can decide what they are buying when they approve grant applications.  Thus, they know what they are spending and what is being bought.

Now we see that consumer uptake heavily favors the latter.  There may be several reasons behind that, such as that the consumer isn’t simultaneously struggling with a complex and arcane tax form at the same time.  The consumer can put more time and thought into the real problem, namely getting rid of the cesspool.

Now maybe we can clean up some of our other tax credits.