Time for the Kapalama Terminal Credit

by Tom Yamachika, Interim President, Tax Foundation of Hawaii

Recently, some news reports pointed to a "Kapalama terminal credit" as an example that certain taxpayers that did very well at the Legislature this year. Let's see what happened.

In West Honolulu lies the former Kapalama Military Reservation, which grew to be populated by some three dozen maritime related businesses. The Department of Transportation (DOT) had put together a $200 million redevelopment plan for the area, basically wanting to turn it into a container yard in order to expand the capacity of Honolulu Harbor's facilities. In order to carry out the plan, the existing business tenants would have to go. In theory that did not pose much of a problem, because these tenants did not have leases, only "revocable permits" issued by the DOT. That meant the tenants could be kicked out at any time, so the DOT basically told them to pack up and be gone by the end of February.

The practical realities, however, are that displacement of businesses creates lots of expenses and pain, not only for themselves but for their suppliers and customers.  For some, there was no alternative because they can't survive without a presence at the harbor.  Could you imagine a ship repair business in a landlocked area?

The department did offer an alternative location along the harbor, again on a revocable permit basis, but this new area has little or no infrastructure so the tenants will be forced to build it if they want to continue doing business at the harbor. And if they do, assuming that the permits have provisions similar to most leases, the State can keep the infrastructure even if the tenant leaves, or is kicked out of, the new space.

The tax credits that this bill creates are designed to give these tenants some relief. A credit of up to half of the capital costs spent by the tenants is allowed up to a maximum of $1.25 million per tenant. The idea was that the businesses would be encouraged to raise more equity capital, and the investors would then be able to claim the credit as a result of investing in the qualified tenant.

Like all tax credits, this one needs to be paid for. Either government needs to shrink, other taxpayers who do not qualify will need to pay a little more to make up for the subsidy, or (as DBEDT loves to argue) the economy will expand and make up the revenue loss that way. Either way, however, there does seem to be some justification for making taxpayers contribute something to the new infrastructure that is going to be created in the harbor area, especially if the State ultimately gets to keep that infrastructure.

The hard-liners among us may say that the tenants had revocable permits. If they can read, they would know that their ability to stay at the harbor could be cut off at any time. Their presence at the harbor created no entitlements, no vested interests; therefore the State owed them nothing. True though that may be, we like to think that our lawmakers are sympathetic folks and were trying to do the right thing even if they didn’t have to.

Now, lawmakers? The challenge from here is to take that sentiment, that essence of good governance, and to apply it not only to a precious few, be it certain businesses, certain age groups, or to the poor, but to apply it to all of us. There is a time for the public to be made to dig deep to help their government; there is also a time for the government to recognize those sacrifices and give back. Let’s use the discussion over this credit to help us all determine what time it is.

---30---