Disappeared News

by Larry Geller

Hawaii keeps looking for the silver bullet, ignoring evidence that there really is no such thing. Today’s paper features two seemingly unrelated articles—the debate over whether Honolulu should establish a “tent city” for those without homes, and another questioning the effectiveness of Act 221 tax credits in creating high-tech jobs in Hawaii.

There may be a relationship between the two issues. Tax credits may help Hawaii solve its problem of moving people into permanent housing, but only as part of a comprehensive program, just as tax credits should have been only a part of our effort to diversify our economy.

First let’s look at how well Act 221 has worked as Hawaii’s only silver bullet to create high-tech jobs. Then I’ll suggest how tax credits may be part of a housing solution.

As we’ve written here before, Singapore set an example of how to use technology tax credits as part of a comprehensive economic plan that spanned decades. The key words are “as part of.” By itself, a tax credit is simply a boon to investors, and as the article in today’s Star-Advertiser notes, can be easily misused. For example, some companies have created subsidiaries that qualify for tax credits but are really providing services to their parent that would ordinarily be operational expenses.

In a nutshell, Singapore used tax credits to lure corporations but huddled down with each of them and let them know what lay ahead. For example, education and housing were to be improved by programs the government was putting into place. This would mean moving from low-wage assembly operations into higher-skill manufacturing and later into engineering, design and research. Companies knew what lay ahead and knew how they would continue to profit by working with the government. Those companies that were willing to work with the program did profit, and Singapore developed pretty much as planned.

Hawaii did none of that. Tax credits by themselves work, if they work at all, only while they are in effect. Companies are free to relocate out of Hawaii when the tax advantage disappears, and that’s exactly what happens. As to the potential for misuse:

First Hawaiian Bank, insurer AIG Hawaii, DTRIC Insurance and  Royal State Insurance are also among the 141 Act 221 companies.

In some cases, non-high-tech companies qualify for the program by creating what's referred to as a "drop-down" subsidiary, in which a portion of their information technology operations are placed into subsidiaries that qualify for technology tax credits. 

Some question whether such a strategy stretches the intent of the program by shifting employees into a subsidiary that provides similar services or sells services primarily to the parent company. That could allow a parent company to get investment tax credits on what otherwise would be operating expenses.  [Star-Advertiser, Data cast some doubt on Act 221's benefits, 7/18/2010]

This question is not new. In fact, the same reporter used the same words in a Honolulu Advertiser article last year:

Some question whether such a strategy stretches the intent of the program by shifting employees into a subsidiary that provides similar services or sells services primarily to the parent company. That could allow a parent company to get investment tax credits on what otherwise would be operating expenses.  [Honolulu Advertiser, List revealed of firms benefiting from Hawaii's Act 221, 2/1/2009]

The earlier article was more specific about First Hawaiian’s creation of three internal subsidiaries and also fingered AIG Hawaii and Honblue. It did not indicate who the “some” were in “some question whether,” but it would be reasonable for the newspaper itself to question how Act 221 has been employed.

Bottom line, as today’s article notes, Act 221 will cost the state upwards of $1.2 billion with no clear understanding of how many jobs have been created, and raised suspicions that in some cases none were created at all. Instead of full disclosure, the tax credits are still partially cloaked in secrecy.

The sliver bullet is clearly tarnished and most likely misaimed.

But tax credits could be part of a comprehensive housing reform solution for Hawaii.

A debate over whether a tent city is advisable is good to hold, but let’s put this into context. Under Mayor Mufi Hannemann, the City of Honolulu has been hostile to those of its citizens who have been unable to find homes. Instead of working with advocates and social service organizations, Hannemann has had advocates arrested.

The arrests resulted in a successful lawsuit brought by the ACLU of Hawaii. A settlement was reached and approved by the City Council in December of 2006. Among the terms of the settlement was an agreed payment of  $65,250 to settle  claims for damages, attorney's fees, and other costs. The Plaintiffs directed that the money be paid to non-profit organizations working to assist those living without homes. The City also agreed not to charge those demonstrating on public property under trespass laws.

Too bad the City didn’t support the agencies until a court-approved settlement forced them to write a check.

Chasing people from park to park has been Hannemann’s legacy rather than the several initiatives that the City actually has put in place to work on the issues. Clearly, the City has done little that has proven effective, and the growing job losses attributable to the current recession has exacerbated the challenges to its woefully inadequate response.

On the state level, not only have emergency shelters been provided, but the Legislature passed HB2318, which became law without Governor Lingle’s signature as Act 212 on July 7.  Act 212:

Establishes the Housing First Special Fund. Requires the Hawaii Public Housing Authority to implement Housing First programs and services as the Authority deems appropriate for clientele who would most likely benefit and succeed from housing first programs, and subject to the availability of existing funds or housing first special fund moneys.

Here’s where tax credits might be effectively applied. Imagine how much $1.2 billion or even a fraction of that would do to provide affordable, rent-controlled housing.

The reason that tax credits may be helpful is that at present, Hawaii has no way to create the necessary housing needed. While Housing First is a proven program, it also is no “silver bullet.” The Act contains enough wiggle room that the state may not spend enough on the program to make it fully effective.

Hawaii has also perpetuated the myth that “affordable housing” can be provided through schemes arranged with developers. Many of the units are not in fact affordable for the people who need housing, and there are no laws in place to regulate rates or prevent profiteering.

Tax credits might be used to help create the needed housing units. “Housing First” is a more permanent approach than creating tent cities. It does, of course, require the availability of housing units that we don’t have at present.

Critics often claim that the “homeless” do not want shelter. This flies in the face of evidence. Of course, there will be some who wish to live outdoors, and a comprehensive solution needs to recognize and work with this. Hawaii is also a special place with regard to living outdoors and I doubt that it can be made illegal.

For those with mental health issues, we need to note that our Department of Health has been slashing, rather than improving, services. Hawaii must reform a system that I view as radically sick if we wish to work effectively with those who both have mental health issues and live in parks. Nor can they be confined to tent cities, since federal law would prevent Honolulu from establishing a “ghetto” for the mentally ill.

Our legislators are on the right track. The Hawaii House Blog quotes Rep. Cabinilla:

"I wrote this bill [HB2318] to effectively address our chronically homeless -- those who suffer from mental illness and addiction and either cannot cope or are not accepted into our emergency or transitional shelters,” said Rep. Cabanilla. “The Housing First concept has been very effective as a cleanup tool in eight major cities. The target population is homeless who linger in streets, parks and major tourist hubs. It will help protect our pristine environment and tourist industry while providing stable housing for the chronically homeless. This is a business as well as a humane model in addressing Hawaii’s homeless problem."

Tax credits may be useful in creating the housing this plan will need for success. Another part would be rent control or rent stabilization. The pioneer in this approach has been the State of New York and New York City in particular. The NYC housing market is remarkably similar to Honolulu’s, but our rents are out of control. From the Wikipedia:

Rent control in New York refers to rent control and rent stabilization programs in New York State, USA. Each city may choose whether to participate or not, and as of 2007, 51 municipalities participated in the program, including Albany, Buffalo and most famously, New York City, where one million apartments are rent-regulated.

New York's rent control program, which began in 1943, is the longest-running in the United States, with New York City the only large city in the United States that has strong rent control laws. From 1943 to 1950, rent control was administered by the federal government. It has been administered by state government since 1950, although state and city agencies shared administrative work from 1962 to 1984.   [Wikipedia, Rent control in New York]

Rent control or rent stabilization keeps affordable housing affordable, and can work hand-in-hand with programs like Housing First to move people into stable living situations. Of course, there would be fierce resistance here, as there has been elsewhere, to imitating New York’s success with its programs. Here is where tax credits may help.

Imagine having that $1.2 billion to create a program that would create housing, and the laws that would keep the units affordable. Add in social services and employment re-training programs and whatever is necessary to make it work.

Far from a silver-bullet approach, we need to recognize that projects such as diversifying our economy or reducing the housing shortage are complex and require multi-faceted approaches. Simply walking away from the issue, or sweeping people from one park or beach to another, as Honolulu has done, will of course solve nothing, but neither will building a tent city. If all we do for high-tech is establish a tax credit and nothing else, we’ll get little benefit. Same for a tent city. Things are much more complicated to believe we can get away with a single approach.

The State is on the right track. Now is the time, with the passage of Act 212, to welcome advocates to work on what might become a comprehensive solution. The state has many laws that the Lingle Administration has refused to implement, this should not be one of them. There’s an opportunity here.

There’s also an overlap with our high-tech aspirations: if Hawaii’s attraction to high-tech executives is its sun and sand, then using beaches as a default housing solution simply demonstrates our incompetence.

Finally, I’d like us to think about using the term “homeless” at all. We no longer refer to those living with schizophrenia, for example, as schizophrenics. Not only does labeling a diverse population create a stigma and encourage discrimination and bigotry, but it gives the impression that ordinary people are somehow monolithic. Those living in our city parks or on the beaches are each different, with different circumstances and cannot be conveniently lumped together or labeled.

We have a housing problem, not a “homeless” problem. We might all get together, now that Act 212 has been passed and the newspaper has put the issue of housing into focus, and put some real effort and commitment into finding a housing solution for Honolulu and for Hawaii. Note: improving access to housing benefits all of us, not just those living on the beaches.

It wouldn’t be easy, but then, what worthwhile undertaking is?

Permalink posted by Larry @ 7/18/2010 12:23:00 PM