From the October 19, 2001 print edition
Spending vs. tax cuts
Lawmakers mull ideas for recovery
Ben DiPietro

Cash flow.

Those are the only two words lawmakers should remember during next week's special legislative session if small businesses are to survive the economic blows dealt by the recent terrorist attacks, says Christine Camp, owner of Avalon Development and Consulting LLC.

Avalon reduced hours for one of its nine employees, and a new hire who was supposed to be full time instead will work part time, says Camp, who chose to tap into a line of credit rather than cut workers.
"That's the story now with most small businesses," says Camp, who also serves as chairwoman of the Chamber of Commerce of Hawaii's Small Business Council. "We're trying to hang on and would rather keep these employees."

State lawmakers agree they must act to prevent ongoing damage to Hawaii's economy, but there is some disagreement on what to do. Some lawmakers want to increase government spending to spur economic growth and keep people working, while others think reducing taxes will put money into the economy more quickly.

Critics of the spending plan say it will increase debt and could take months to get the money into the hands of local businesses and workers. Those who oppose tax cuts say they will drain revenues from the state general fund, which is estimated to lose between $500 million and $1 billion because of the Sept. 11 attacks.

Companies need lawmakers to enact measures that immediately put money into the economy and cut down on business expenses, Camp says. Measures proposed by small businesses in meetings with Gov. Ben Cayetano and other leaders include deferring general excise tax payments, late fees and penalties, and charges assessed by state and county governments; suspending lease-rent payments; and expediting payments from government agencies.

"The simple act of paying invoices promptly will do more for businesses than deferring taxes," says Louis Darnell, president of ComTel Inc.

The communications company is waiting for a $25,000 payment from the state. It has 15 employees and hasn't made any layoffs, says Darnell, who took a home equity loan to keep his staff working. "There should be a special effort to buy services locally and pay promptly," he says.

Extending unemployment benefits and providing a social services safety net for those out of work are important, but Camp says keeping companies in business is the best way to fix the economy.

"Those issues are critical but if you allow us to be healthy, maintain our businesses and not lose our footing, we won't need to lay these people off," Camp says. "We could hire people."

Republicans are proposing a cut in the state's 7.5 percent capital gains tax rate, suspension of the 4 percent G.E.T. for food and medicine purchases and an excise tax holiday for retail sales under $100. Such a move will add between $20 million and $30 million to the economy and keep companies in business and paying taxes, says Sen. Sam Slom, R-Hawaii Kai-Aina Haina.

"The government doesn't have those taxes. It has to get them from us," Slom says. "If people don't continue to work, if those businesses don't continue, they get nothing."

Majority Democrats fear the loss of state revenues from the tax cuts that, when added to losses anticipated because of the impact of the attacks, will cause problems with the state's social services safety net.

"If we lost the revenues on [food and medicine] we won't be able to fund health insurance for those who are in the "gap group" covered by the state's Quest program, says House Speaker Calvin Say, D-Palolo Valley-St. Louis-Kaimuki. "We really won't know what the impact will be until we see the figures for what we can afford, knowing next month the Council on Revenues will probably revise their projections downward."

Democrats remain open to the tax cut ideas, and even have proposed some tax holiday measures of their own, Say says.

Lawmakers won't repeal the ongoing reductions to the state personal income tax rate and the depyramiding of the G.E.T., he says.

"If we can accommodate them without severe general fund losses, I think the House majority is open to some of these ideas,"Say says.

Both parties support extending unemployment benefits for those laid off as a result of the terrorist attacks for an additional 13 weeks at an estimated cost of $70 million. Democrats have a bill to take 300 to 400 unemployed workers and use them to fight dengue fever, miconia and the non-native coqui frog.

"If the government is going to pay unemployment benefits to these people, it makes sense to put them to work," says Rep. Brian Schatz, D-Makiki-Tantalus. "It's a three-month program to address the immediate environmental health crisis."

Democrats also are backing an airline-loan-guarantee bill that would let the local carriers borrow money at the state's preferred interest rate, says Rep. Sylvia Luke, D-Punchbowl-Pauoa. "It's not money that we're just going to give to them if they need capital," she says. "They can borrow the money and we'll guarantee it."

Lawmakers want to spend $24 million to improve airport security and $4 million to protect state harbors. Other measures being considered include requiring the state to favor local contractors over outside companies, letting the state insurance commissioner set health insurance premiums and allowing small-business owners to collect unemployment.

Legislators remain split on whether to use the $200 million in the hurricane-relief fund as some feel the money should be returned to those who paid it to the fund. Others say the fund money will be used as collateral to obtain general obligation bond funding to pay for construction projects.

"It's to make sure you can back up the debt," says Senate President Robert Bunda, D-Wahiawa-Waialua-Sunset Beach. "It's really for our bond rating."

Debate also continues on what type of emergency powers to give the governor so he can push through construction projects, deal with health problems like dengue fever and a possible anthrax attack, and for how long he should have such powers.

"We understand he needs some powers but they need to be restricted and there needs to be some kind of oversight," Luke says.

Along with debate over which projects to fund, questions also remain as to whether state rules regarding procurement and permitting will be waived to allow contracts to be awarded faster, along with whether state departments and agencies are equipped to handle an onslaught of new construction work, Say says.

"There are lots of questions that haven't been answered by the administration," he says.
It's not the time to ask such questions, says businesswoman Bev Harbin of the Kakaako Improvement Association, who thinks the governor and legislative leaders must take charge and issue mandates to speed up the bureaucratic process.

"I don't think the departments are well equipped to do this, but we cannot ask those questions now. It's not a matter of can they do it. They must do it," Harbin says. "The department heads, the ones who are held politically accountable, they need more of a hammer to make the bureaucracy do what it has never done before: move fast."

As lawmakers from both parties pledge bipartisan cooperation, Harbin says it will be impossible to keep politics entirely out of the equation, with all 76 lawmakers and most state and county officeholders facing re-election next year.

"A lot of what is going on is politics. Who will lead the fight?" Harbin asks. "If you lead and you fall on your face, it's going to be horrible for you in the upcoming election."

Reach Ben DiPietro by e-mail bdipietro@ bizjournals.com or by phone at 955-8039

Pacific Business News (Honolulu) - October 22, 2001
http://pacific.bizjournals.com/pacific/stories/2001/10/22/story2.html

© 2001 American City Business Journals Inc.