Editor’s note: This is the third in a series of stories that takes a closer look at specific issues facing Hawaii and how Democratic gubernatorial candidates would address them. Also coming this week, Civil Beat teamed up with Hawaii News Now for in-depth interviews with the leading gubernatorial candidates in the Democratic and Republican primaries. Civil Beat will post the full interviews on our Gubernatorial Race page, where you can find all of our coverage of the primary race.
The terrifying shutdown of tourism at the start of the pandemic underscored the dangers of Hawaii’s deep dependence on the visitor industry, and Vicky Cayetano is proposing a dramatic cut in small business taxes as her most important strategy for finally diversifying the state’s economy.
Gov. Josh Green, meanwhile, wants to use government subsidies to boost local agriculture, including property tax breaks, direct grants to farmers for infrastructure and tax breaks for startups until they become profitable.
Civil Beat asked the top Democratic gubernatorial candidates for their top-priority, short-term initiatives to diversify the economy, and Green and Cayetano responded with those ideas.
U.S. Rep. Kai Kahele, another front-runner in the Democratic primary, declined to be interviewed for the series, saying through a spokesman that he is unhappy with the way Civil Beat has covered the gubernatorial race.
Diversifying the state’s economy has been a talking point for politicians for decades, as the tourism industry grew to 10 million visitors a year, and as the state’s economy became increasingly dependent on it.
Cayetano, a successful longtime Hawaii businesswoman, said Hawaii’s small businesses took a terrible hit during the pandemic and “they desperately need help.” She is suggesting the state halve the excise tax on companies with annual gross revenues of $5 million or less, and says the tax break should be permanent.
“If you look around, almost every day you’re reading about another business going under,” she said. “When there’s not a balance between small, local, family-owned businesses and large retailers, it really doesn’t serve residents in the long run.”
The excise tax at the retail level is now 4.5% in Honolulu, Kauai and Hawaii counties and is 4% in Maui County. The state received nearly $4 billion from this tax last fiscal year — more than 40% of the state’s total general fund tax collection — making it critically important to fund state government operations.
Cayetano is running as a Democrat, but was a Republican before marrying former Gov. Ben Cayetano in 1997, and her tax cut idea sounds a bit like a Republican proposal. But she rejects any attempt to put a partisan label on it, saying it would be good for everyone.
When asked how he would sell it to the overwhelmingly Democratic Legislature, Cayetano replied, “I believe that when you tell the story and let them understand what’s at stake, they will be supportive.”
“If we keep the small business community alive and thriving, everyone will benefit. So giving them a tax break is better than not having any income from them when they go under,” she said.
Cayetano acknowledged that her proposal is partly protectionist — it seeks to support businesses that are already here — but said attracting new businesses or growing existing businesses requires a “business-friendly culture” and cutting her taxes would be a beginning.
“It’s so hard to start a business today, it really is, and so if we want, we want a diverse economy, we have to look at the culture that we have, and Hawaii is not known for a business-friendly culture. to start,” she said. “We all know this, but no one is talking about it.”
But the excise tax relief proposed by Cayetano presents practical as well as political problems. For example, staff at the Department of Taxation say the state wouldn’t know if a particular business qualified for Cayetano’s 50% excise tax reduction until the business filed a year-end tax return showing it had less than $5 million in revenue.
By then the customers in that business would have already paid the full tax, which is obviously unfair. It appears that the owner of a business that qualifies for tax relief will then keep half of the money collected from the business as tax as profit.
Paul Brewbaker, economist at TZ Economics, said another problem is that Hawaii’s state constitution requires a balanced budget, meaning Cayetano’s plan would either force the state to cut spending or lose excise revenue. would have to be compensated with an increase in taxes. somewhere else.
Supporters of tax cuts sometimes claim that tax cuts stimulate so much economic growth that all the lost tax revenue can be recouped through an increase in new business activity, “but that math never works,” Brewbaker said. He said the “rule of thumb” is that the growth spurred by a $100 million tax cut generates only $20 million in new tax collections.
Green’s answer to diversifying the economy is to grow the agriculture and energy sectors, including targeted subsidies and tax credits for agriculture. He specifically mentioned tax credits for taro farming and for people interested in restoring or operating traditional fishponds.
“We have agriculture and we have energy leaders in Hawaii, they just haven’t been supported enough to get off the ground completely,” he said. “To diversify we’re going to have to support it, and that means tax credits to support land use.”
Green wants to help farmers with infrastructure like large greenhouses, which he said can cost $1.5 million each and may be out of reach for startups.
He also believes housing for agricultural workers will be key, because without housing the industry may not be able to attract the labor it needs. It raised the possibility of tax credits for people who build agricultural housing on productive land.
The government support Green envisions would include property tax breaks, direct grants to support agricultural investment and productivity-based tax credits, meaning the state won’t tax operations until they become productive. It would also consider “tax breaks” for operations that create jobs in Hawaii.
“For large investments that commit to employing local workers, we want to support them until they are profitable,” he said.
Farmers in Hawaii have struggled to make ends meet for years in part because of high land, labor, transportation and other costs, but Green remains confident that specialty farming can still be profitable. In particular, he cited the successful cultivation of hemp and medical marijuana in other states, which he says is “very possible for us.”
Farmers in Hawaii have been calling for more investment in agriculture, but some are skeptical that it’s a promising path to diversifying the state’s economy.
Brewbaker said large-scale farming outside of Hawaii has become much more efficient, making it extremely difficult for Hawaiian farmers to compete. This helps explain why agricultural employment in Hawaii has fallen from 60% of the workforce a century ago to less than 1% today.
“The experience of the last few generations since the creation of the state has been that no matter what you do – be it orchids, of course sugar and pineapples, but also in the plant breeding industry – eventually someone will find a way to do it somewhere or labor is cheaper, or land is cheaper, or there is more of both,” he said.
He said there is potential in high-value, niche markets, “but all the actual farmers, all the actual farmers will tell you, it’s really hard to make money, and then they (thieves) come in and they steal the crops. before harvest,” he said.