Honolulu council should take time, consider whether Bill 45 is a good investment

The vague language in the proposal lacks any metrics for measuring success, similar to another business-focused tax credit whose value to the state is dubious.

by Devin Thomas, Hawaii Budget and Policy Center, June 7, 2022

Since November of 2021, the Honolulu City Council has been considering Bill 45, a measure that would provide large property tax breaks, expedited permitting, and fee waivers to businesses within transit-oriented development (TOD) areas. These TOD areas, which are located along the planned rail line, allow for exemptions and incentives that are meant to encourage high-density development. 

However, while the stated purpose of Bill 45 is to promote economic growth, there is no way to show that providing the additional incentives in Bill 45 would be a cost-effective use of the city’s funds. 

First of all, businesses would have to meet a number of requirements to be eligible for the benefits provided by Bill 45. To qualify, a business would need to both: 

Belong to one of the “growth industries” identified by the Department of Business and Economic Development (DBEDT), which include the technology, agribusiness and film sectors; and 

Support the growth of their industries and provide a net benefit to the City and County of Honolulu’s revenue stream (though what that specifically means is unclear from the bill). 

After meeting these requirements, businesses would then qualify for different levels of benefits based on two tiers of eligibility: 

At the top tier, businesses would have to invest a minimum of $100 million in new facilities within a TOD area and create at least 100 new jobs at these sites. In return, they would receive a property tax rebate for the cost of improving their new facilities for 30 years.

At the second tier, businesses would have to invest $50 million into their new facilities within a TOD area and create 50 new jobs. Businesses in this tier would also be entitled to property tax rebates for improvements, though these rebates would be limited to a period of three years.

In evaluating whether or not this is a good deal for the city, it’s important to place Bill 45 in the context of other tax credits that were intended to stimulate economic growth in Hawaiʻi. 

Beginning in 1999, a series of state tax credits were created for high-technology investment and research, costing the State of Hawaiʻi an estimated $657.5 million in lost tax revenues through 2009. Between 2014 and 2016, the High Technology Business Investment Tax Credit—which was phased out at the end of 2010—was still being claimed by businesses for a total of $78.2 million. 

However, it remains unknown whether these tax credits produced a net benefit for Hawaiʻi. In a 2012 review, Hawaiʻi’s state auditor concluded that the high-tech tax credits “did not contain any goals and performance measures to effectively measure the tax credits” and that the Department of Taxation did not investigate businesses’ self-reported numbers during the application process. 

In a similar way, Bill 45 does not clearly outline its metrics for success, and there has yet to be an analysis of its costs and benefits. Without this data, the Honolulu City Council cannot make an informed decision about the bill itself.

The Honolulu City Council has already passed Bill 45 through two readings with little discussion of its potential costs. If Bill 45 passes through another committee and a third reading, it will then be forwarded to Mayor Blangiardi, who has publicly expressed his support for it. 

Before proceeding further, the Honolulu City Council should carefully weigh whether Bill 45 is truly a good long-term investment of taxpayer money. Even without Bill 45’s property tax rebates, businesses in TOD areas would still receive massive economic benefits from development exemptions, rising property values, and their location in densely populated areas that will be served by the future rail line.