Unfriendly Skies?

by Tom Yamachika, President Tax Foundation Hawaii

Recently, Sen. Jill Tokuda and Rep. Sylvia Luke were talking about some breaks from our general excise tax that are now being given to the airlines, and were wondering out loud whether those breaks had outlived their usefulness.

Serious students of history may wonder what is going on. There is, after all, a federal law that prevents Hawaii taxes from touching an airline’s gross income for transporting passengers or cargo. The State tried to tax this income under our Public Service Company Tax, but the U.S. Supreme Court would have none of it.

But Hawaii taxes are everywhere, and can affect the industry indirectly. For example, all aircraft need maintenance that can be quite pricey. And, if it weren’t for an exemption enacted in 1997, all of it would be subject to the Hawaii general excise tax (“GET”).

Back in 1997, Continental Airlines was considering building a $24 million jet maintenance hangar close to the Honolulu International Airport. To lure the project away from Guam and Saipan, our lawmakers at the time offered incentives, including a GET exemption. The exemption applied to servicing and maintenance of aircraft, or from the construction of an aircraft service and maintenance facility. But “aircraft,” as used in the exemption statute, was restricted to aircraft with two or more jet engines. Small carriers with propeller planes don’t qualify, raising some questions about whether this particular exemption helps the industry fairly. Is it simply a reflection of the economic realities – namely that the big planes can fly elsewhere to have the maintenance work done, while smaller aircraft are effectively trapped here? A better approach may be to have the exemption apply (or be repealed) across the board; the current structure leaves the impression that big business skates by where small business is left behind.

The aircraft servicing and maintenance exemptions are in one of two provisions the money committee chairs are re-examining.

The second one, Act 210 of 2001, exempted any rent for aircraft or aircraft engines used for interisland air transportation of passengers and goods. This one was motivated because our GET applies differently to different financing mechanisms. Most airlines need to finance their major purchases such as aircraft and engines. If they borrowed from a mainland financial institution, the GET typically would not apply either to the principal or interest being paid by the airline. However, many lenders finance such equipment by way of operating leases. If the equipment is in Hawaii, or flying between our islands, the GET could apply to the lease rent that the airlines pay, and would apply if it weren’t for Act 210. At least this exemption seems to be more even-handed than the other one.

Sen. Tokuda told the Star-Advertiser that exemptions from tax once granted should be reviewed every so often. We agree. Every year, we ask our government agencies to appear before the Legislature and the public so we can figure out what the agencies did to earn the money we give them through the legislative appropriations process. We also give up hard-earned tax dollars to specific industries or programs through the tax system by way of credits, exemptions, and incentives. If the amount of dollars being given up this way is significant, we, the taxpayers, should expect that our legislative leaders will take a look at these tax expenditures as well. It may well be that the benefits still outweigh the costs, but our lawmakers and the public need to have a current understanding of what they are. In that way we can have greater confidence that our tax burdens are being distributed wisely.

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