Friday, March 03, 2006


Supreme Court weighs legitimacy of state tax incentives in Cuno case

The Supreme Court heard oral arguments Wednesday in Daimler Chrysler vs. Cuno, a case from Ohio which asked the Court to decide whether one state may offer tax incentives in order to lure a business from another state. Hawaii's effort to attract high-tech businesses from the Mainland may hang in the balance.

The use of tax incentives in Hawaii has been and should be controversial. Hawaii uses these corporate handouts in place of infrastructure advantages such as a quality educational system, efficient transportation network, low-cost and skilled work force, and proximity to markets and suppliers. It hasn't worked very well up to this point, and the Supreme Court decision in this case may influence whether tax incentives may be used at all in the future.

An example of how they are used: In 1989 representatives from Motorola came to Hawaii to discuss the possibility of moving a major facility into the Mililani High Technology Park, owned by Castle & Cooke. Serious negotiations included offers of tax breaks and what kind of a deal Castle & Cooke would make on a facility in their tech park.

Motorola would have been a good catch for the tech park, which is in the middle of nowhere on an island in the middle of the Pacific. Up to that point, arguments that Hawaii had advantages for high-tech companies were less than persuasive. Hawaiian Tel had put a fiber optic hub in the park but there were no takers, they just hooked everyone up with ordinary phone lines. Tech companies came and went, as economic reality set in for each of them. It didn't matter how much the CEO might want to continue to live in this island Paradise. One by one, companies moved on.

The heart of the Motorola deal would have been major tax incentives. The main beneficiary, aside from Motorola, would have been Castle & Cooke. Imagine that tax money that should have gone to other services would instead be used for a lavish subsidy for the developer. This is one of the main arguments in the Cuno case.

As it turned out, Motorola may have been playing Hawaii against Illinois, that is, trying to get a better deal to stay where it was. In the end, it stayed in Illinois.

The state of Hawaii negotiated seriously, but one wonders why a manufacturer would import parts, assemble them with high-cost labor, and ship them back across the vast Pacific in the first place.

Tax incentives, of course, might have swayed them. This would mean that we taxpayers would be providing a kind of corporate welfare, a handout, to keep Motorola in that tech park. And if the tax incentive had a time limit, one could imagine the company packing up one day and heading back to the lower-cost Mainland. Yes, reality inevitably sets in. The bean counters will come knocking at the manager's door and let him know that it is not in the stockholder's interest to keep the operation in sunny Hawaii in the absence of those massive tax incentives.

According to reports, the Supreme Court justices seemed skeptical of the taxpayer's arguments. Who knows how this case will be decided.

For the moment, the case seems to be under our radar. If it is decided in favor of the taxpayer group, it could have the impact of a sneak attack on our high-tech plans.


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