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The Honolulu Advertiser
Posted on: Sunday, March 21, 2010

Home fix-ups may earn tax credit

By Andrew Gomes
Advertiser Staff Writer

Hawaii news photo - The Honolulu Advertiser

Construction worker Sean Lopez works on a remodeling job in Kāne'ohe. Home-owners might get a tax credit to offset the excise tax on remodeling expenses.

Photos by RICHARD AMBO | The Honolulu Advertiser

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• 4 percent tax credit for home renovation/remodeling work between 2011 and 2013.

• Homeowners would be eligible for credits against design, construction and material costs.

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Hawaii news photo - The Honolulu Advertiser

Construction worker Sean Lopez works on a remodeling job in Kane'ohe. Home­owners might get a tax credit to offset the excise tax on remodeling expenses.

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A new kitchen, roof, carpet or other home improvements could earn Hawai'i homeowners a tax break if a bill that has so far sailed through the Legislature becomes law this year.

The proposed tax credit would encourage home remodeling statewide over the next few years in an effort to bolster Hawai'i's flagging construction industry and economy, though the size and scope of the measure have yet to be nailed down.

House Bill 2381 was introduced to provide a 4 percent tax credit to homeowners for home improvement design, construction and material costs.

Under the most recent amended version of the bill, the credit would apply to qualified spending between 2011 and 2013.

The Senate Education and Housing Committee passed the bill recently after House approval last month. But the measure still faces scrutiny from the Senate Ways and Means Committee, and potentially from Gov. Linda Lingle, who prefers a hotel construction and remodeling tax credit over a residential remodeling credit.

Other uncertainties surrounding HB 2381 include an unspecified cap on credits a homeowner can claim, and the lack of estimates on how much spending the bill might create and at what expense to state tax revenue.

State Rep. Sharon Har, who introduced the bill, said the tax credit essentially discounts home improvement costs for homeowners by roughly what they would pay in general excise taxes on materials and services.

"It's really a wash," said Har, D-40th (Royal Kunia, Makakilo, Kapolei).

Most of the written testimony in support of the bill has come from various construction industry trade associations. The Kaua'i Chamber of Commerce and Maui development firm Dowling Co. Inc. also testified in support of the measure.

One usual critic of tax credits, the Tax Foundation of Hawai'i, is expressing willingness to support the bill because it stands to spur consumer spending and employ construction workers quickly, with the expense trickling in for the state later as homeowners file income tax returns.

It's a nonrefundable credit against income taxes, meaning homeowners can reduce their state income tax liability by the credit amount, which in some cases could be redeemed over several years if the credit is bigger than taxes owed in one year.

"I got talked into saying OK," said Lowell Kalapa, executive director of the nonprofit Tax Foundation.

The state Department of Taxation in testimony said it supports efforts to stimulate the economy through incentives that would resurrect jobs for many out-of-work construction workers.

"With many construction workers and suppliers impacted by the economic downturn, this measure will encourage taxpayers to invest in their homes and put people back to work."

However, the agency also expressed concern that the cost to the state is undetermined because the cap remains unspecified. Also, the most recent amended version of HB2381 changed the 4 percent tax credit to a blank amount to be decided later.

The Tax Department also said a hotel construction and remodeling tax credit would be better.

Several Maui hotel industry representatives urged lawmakers to combine the home remodeling tax credit bill with language from a stalled bill that provides a tax credit for hotel construction and remodeling.

The Lingle adminstration prefers a hotel construction and remodeling tax credit over the home improvement tax credit.

Linda Smith, Lingle's senior policy adviser, in written testimony on HB 2381, advocated instead for a bill that would provide a nonrefundable tax credit for hotel and resort construction from Jan. 1, 2010, to Dec. 31, 2012, capped at $50 million per year.

The bill favored by Lingle, Senate Bill 2712, would stimulate both the construction and tourism industries — two major drivers of the state's economy — with a 10 percent tax credit.

According to a state Department of Business, Economic Development and Tourism estimate, the hotel industry measure would generate up to $1.5 billion over three years in construction spending at a cost to the state of $150 million, offset by $75 million in added tax revenue, and create up to 23,000 jobs, Smith said.

Smith also criticized the home renovation tax for its unspecified credit cap per homeowner and no aggregate cap limiting the cost to the state. She also noted that the bill's liberal criteria for qualified spending make the impact on construction activity questionable. "Arguably, credits can be claimed by homeowners for replacing curtain rods, door knobs, or other fixtures, but they would not necessarily increase construction activity or create jobs," Smith said in her written testimony.

The Tax Foundation is opposed to a variety of hotel construction tax credit bills that have stalled in the Legislature, in part because financing for such projects has been severely constrained.

Har said that even if major hotel construction and renovation projects can be financed, their planning and execution will take too long to provide the desired quick lift to the state's economy and construction industry.

She said it's easier for homeowners to tap equity in their property to make improvements. "You're going to see an immediate injection of funds into the economy," she said.

Lingle, in a speech Friday, said Hawai'i hotel construction projects in the works would have a greater impact. "There's nothing else that would put more construction workers back to work right now than these hotel and resort projects," she said. "They're ready to go and on the verge of getting their financing."

A hotel construction and renovation tax credit was one of several recommendations made by a task force established by a state Senate concurrent resolution last year in an effort to help preserve and create construction jobs. The task force didn't suggest a home remodeling tax credit, though it did recommend an income tax credit for new-home purchases.

A bill that would provide buyers of new homes priced under $625,000 a tax credit equal to 2 percent of the purchase price up to $6,000 was introduced and passed by the Senate earlier this month.

The bill, Senate Bill 2578, has yet to be heard in the House.

Some observers believe it's possible that lawmakers will pass tax credits for home improvement and hotel construction projects in an amended HB 2381, similar to a law passed in a special legislative session in 2001 after the fallout from the Sept. 11 terrorist attacks hurt Hawai'i's economy.

The 2001 law, Act 10, provided a 10 percent hotel construction and remodeling tax credit, along with a 4 percent credit on residential construction and remodeling project costs up to $250,000 through July 1, 2002. Later, the credits were extended through July 1, 2003.