Organically Grown Tax Credits on Way to Governor

by Tom Yamachika, President Tax Foundation, Hawaii

Recently we alerted you to a new tax credit that sprouted like a weed during our legislative session.

The legislature was busy working on a bill to replace the ethanol fuel production credit, which no one had taken advantage of, with a more broadly applicable tax credit for the production of renewable fuels. Bills on this subject included SB 2652 and HB 1689. When House Bills went over to the Senate and vice versa, both bills contained language to accomplish this objective and had no extraneous matter.

When the House Committee on Energy and Environmental Protection got the Senate bill, however, it snuck in an “organic foods production credit.” This new credit was contained in a proposed draft of SB 2652 that was posted on March 18, Friday, for a committee hearing on the following Tuesday, March 22. EEP passed it out and it went over to the House Finance Committee. Notice of the Finance hearing was posted on Wednesday, March 30, and the hearing was on Friday, May 1. Finance passed the bill out with minor amendments.

When the two tax credit bills went into conference, the Senate was seeing the organic foods production credit for the first time but it decided to play along nevertheless. Lawmakers deleted the organic foods production credit language from SB 2652. They still had HB 1689, which they now didn't need. Instead of trashing the bill, however, they recycled it! Its contents were gutted and replaced it with the organic foods production credit. Because that bill was titled “Relating to Taxation,” it was technically legal for them to do this. Both bills are going up to the Governor now.

The organic foods production credit proposed is equal to 100% of a qualified farmer’s qualified expenses, up to $50,000. A qualified farmer is one who grosses no more than $500,000 in sales of organic products (although it could have tens of millions in sales of non-organic products). Qualified expenses are those incurred to produce agricultural products, including application fees; inspection costs; fees related to equivalency agreement/arrangement requirements, travel/per diem for inspectors, user fees, sales assessments, and postage; and costs for any equipment, materials, or supplies necessary, including certified organic seed, cover crops, or animal feed.

In other words, we taxpayers are going to pay most, if not all, of a farmer’s expenses for producing organic foods. And we get back only the same taxes that any other producer of non-organic foods would pay. Most business-related tax credits award a far smaller percentage of the qualifying expenses, such as the motion picture, digital media, and TV film production credit (20% or 25%), the credit for school repair and maintenance (20%), and the capital goods excise credit (4%). If a credit is to be awarded, it should be at less than 100% so that the farmer is motivated to make good, economic business decisions. The USDA’s Organic Certification Cost Share Program pays an organic farmer no more than 75% of eligible costs, perhaps for that reason.

The good news, if you could call it that, is that the credit is limited to $2 million statewide per year, and is scheduled to sunset at the end of 2021. In addition, a taxpayer can’t just file a tax form to claim these credits and expect a check in the mail; the taxpayer’s claim needs to be pre-certified by the Department of Agriculture just like how the Hawaii Film Office pre-certifies claims for the motion picture credit.

If this credit does indeed become law, expect to see a lot of begging and pleading in the 2020 and 2021 sessions for an extension. It will be very tough for these farmers or agriculture companies to give up the credit once they get it.