Aloha Airlines is getting a break on state taxes.

The state has agreed to forgive more than $1 million owed by Hawai'i's second-largest airline, according to a Bankruptcy Court filing last week.

The state also agreed to allow Aloha to delay payments on millions of dollars in delinquent landing fees, the filing said.

Aloha plays an important role in Hawai'i's economy by providing competition in the local interisland market, employing a large number of residents and by providing cargo services for the Neighbor Islands, said Kurt Kawafuchi, director of the state Department of Taxation.

In addition, Kawafuchi said, the chance for full recovery of taxes owed was slim.

Most of the past-due taxes were in the form of unsecured debt, and Aloha has stated in Bankruptcy Court documents that its unsecured creditors would receive about 5 cents on the dollar or less.

Aloha, which filed for Chapter 11 reorganization in December 2004, is seeking approval from dozens of creditors, including the state, to emerge from bankruptcy protection in January. The airline declined comment on the agreement to reduce its state taxes.

Aloha paid about $5.6 million in state corporate income taxes and $1 million in general excise tax in a one-year period, according to a December report commissioned by the airline titled "The Importance of Aloha Airlines to Hawai'i's Economy."

Lowell Kalapa, president of the nonprofit Tax Foundation of Hawaii, says the state is taking a good risk by helping Aloha. If Aloha ceased flying to the Neighbor Islands, the consequences "would be tragic" for the local consumer, Kalapa said.

Kalapa added that the state's budget currently has a surplus, and the amount that's being forgiven is relatively small compared to the large tax credits that are being given to high-tech companies and developers, such as Jeff Stone, whose $1 billion development at Ko Olina will be financed in part by a 10-year state tax credit of $75 million.

"I think that a million dollars is not all that bad if the state can give $75 million to Jeff Stone," Kalapa said.

Under its settlement with the state, Aloha has agreed to repay $5.5 million owed to the Department of Transportation for past-due landing fees but will spread out those payments over several years.

The state uses such fees to pay for operations at Hawai'i's airports, including Honolulu International, which is to receive $8 million this year for terminal modernization projects, some as basic as fixing leaking roofs.

The airport serves more than 20 million passengers a year.

Reach Rick Daysog at rdaysog@honoluluadvertiser.com.