HB2357 SD1

PART I

SECTION 1. In 1978, voters approved article XI, section 3, of the Constitution of the State of Hawaii, which set out the framework for state policies to promote agriculture and the conservation of productive agricultural lands in the State. Article XI, section 3, reads as follows:

"The State shall conserve and protect agricultural lands, promote diversified agriculture, increase agricultural self sufficiency and assure the availability of agriculturally suitable lands. The legislature shall provide standards and criteria to accomplish the foregoing.

Lands identified by the State as important agricultural lands needed to fulfill the purposes above shall not be reclassified by the State or rezoned by its political subdivisions without meeting the standards and criteria established by the legislature and approved by a two-thirds vote of the body responsible for the reclassification or rezoning action."

To address the issue of important agricultural lands, Act 183, Session Laws of Hawaii 2005, established standards, criteria, and mechanisms to identify important agricultural lands and to implement the intent and purpose of article XI, section 3, of the Hawaii state constitution.

Act 183 also recognized that while the supply of lands suitable for agriculture is critical, the long-term viability of agriculture also depends on other factors, including:

(1) Commodity prices;

(2) Availability of water for irrigation;

(3) Agricultural research and outreach;

(4) Application of production technologies;

(5) Marketing; and

(6) Availability and cost of transportation services.

The purpose of this Act is to provide incentives and protections to establish and sustain viable agricultural operations on important agricultural lands.

PART II

SECTION 2. Chapter 235, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§235‑ Rental income from agricultural leases on important agricultural lands excluded from gross income. (a) In addition to the exclusions in section 235-7, there shall be excluded from gross income, adjusted gross income, and taxable income, rental income, including lease rents, in an amount not to exceed $ that is received by a taxpayer subject to the taxes imposed by this chapter, that is derived from agricultural leases on lands identified and designated as important agricultural lands pursuant to part III of chapter 205, for the taxable year the rental income was realized; provided that:

(1) The minimum length of the initial lease term shall be:

(A) Twenty years; or

(B) Any other lease term mutually agreeable to the lessor and lessee, if the amount of the lease rent is set by an independent appraisal using the lower of the comparable value or agricultural capitalization appraisal methodologies; and

(2) The lease is in effect and the lessee is continuously and substantially undertaking agribusiness on the leased land, pursuant to chapter 205, as verified by the department of agriculture on a regular basis using a process determined by the department of agriculture;

provided that the exclusion shall not apply if the lease is terminated or the department of agriculture determines that the leased land is not continuously and substantially used for agribusiness.

(b) Each taxpayer who claims the exclusion under this section shall annually provide any necessary information determined by, and in a manner prescribed by the department of agriculture to enable an aggregated quantitative and qualitative assessment of the impact of the exclusion.

"Agribusiness" means a business licensed for the production, processing, and sale of products from the cultivation of crops, propagation of fish or game, or raising of livestock."

SECTION 3. Section 237-24.75, Hawaii Revised Statutes, is amended to read as follows:

"§237-24.75 Additional exemptions. In addition to the amounts exempt under section 237-24, this chapter shall not apply to:

(1) Amounts received as a beverage container deposit collected under chapter 342G, part VIII;

(2) Amounts received by the operator of the Hawaii convention center for reimbursement of costs or advances made pursuant to a contract with the Hawaii tourism authority under section 201B‑7[[]; and[]

[](3) Amounts received[]] by a professional employment organization from a client company equal to amounts that are disbursed by the professional employment organization for employee wages, salaries, payroll taxes, insurance premiums, and benefits, including retirement, vacation, sick leave, health benefits, and similar employment benefits with respect to assigned employees at a client company; provided that this exemption shall not apply to a professional employment organization upon failure of the professional employment organization to collect, account for, and pay over any income tax withholding for assigned employees or any federal or state taxes for which the professional employment organization is responsible. As used in this paragraph, "professional employment organization", "client company", and "assigned employee" shall have the meanings provided in section 373K-1[.]; and

(4) Rental income, including lease rents as provided in section 235‑ in an amount not to exceed $ ."

SECTION 4. There is appropriated out of the general revenues of the State of Hawaii the sum of $ or so much thereof as may be necessary for fiscal year 2008-2009 for the department of agriculture to collect and analyze data to make an aggregated quantitative and qualitative assessment of the impact of the exclusion of rental income from important agricultural lands from income and general excise taxation.

The sum appropriated shall be expended by the department of agriculture for the purposes of this part.

SECTION 5. The department of agriculture shall submit to the legislature an annual report, no later than twenty days prior to the convening of each regular session, beginning with the regular session of 2010, regarding the quantitative and qualitative assessment of the impact of the exclusion of rental income from important agricultural lands from income and general excise taxation.

PART III

SECTION 6. Chapter 205, Hawaii Revised Statutes, is amended by adding a new section to part III to be appropriately designated and to read as follows:

"§205‑ Important agricultural land; residential housing. A landowner qualifying under section 205-44 may develop, construct, and maintain residential dwelling units for farmers, employees, and their families on important agricultural land; provided that:

(1) The farmers' dwelling units shall be used exclusively by farmers and their immediate family members who actively and currently farm on important agricultural land upon which the dwelling is situated; provided further that the immediate family members of a farmer may live in separate dwelling units situated on the same designated land;

(2) Employee dwelling units shall be used exclusively by employees and their immediate family members who actively and currently work on important agricultural land upon which the dwelling is situated; provided that the immediate family members of the employee shall not live in separate dwelling units and shall live with the employee;

(3) The total land area upon which the farmer and employee dwelling units and all appurtenances are situated shall not occupy more than per cent of the total important agricultural land area controlled by the farmer or the employee's employer;

(4) The farmers' and employee dwelling units meet all applicable building code requirements;

(5) Notwithstanding section 205-4.5(a)(12), the landowner shall not plan or develop a residential subdivision on the important agricultural land; and

(6) The plans for farmers' and employee dwelling units shall be supported by agricultural plans that are approved by the department of agriculture."

PART IV

SECTION 7. Tax incentives are a critical component of the long-term viability of agriculture on important agricultural lands in the State. The legislature finds that it is in the public's interest to assist agricultural businesses in establishing and sustaining viable agricultural operations on important agricultural lands by providing incentives such as income tax credits.

The purpose of this part is to establish an important agricultural land qualified agricultural cost tax credit to establish and sustain viable agricultural operations on important agricultural lands.

SECTION 8. Chapter 235, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§235‑ Important agricultural land qualified agricultural cost tax credit. (a) There shall be allowed to each taxpayer, an important agricultural land qualified agricultural cost tax credit that shall be deductible from the taxpayer's net income tax liability, if any, imposed by this chapter for the taxable year in which the credit is properly claimed. The tax credit shall apply as follows:

(1) In the year qualified agricultural costs are incurred, fifty per cent of the qualified agricultural costs up to a maximum of ;

(2) In the first year following the year in which qualified agricultural costs are incurred, twenty per cent of the qualified agricultural costs up to a maximum of ;

(3) In the second year following the year in which qualified agricultural costs are incurred, ten per cent of the qualified agricultural costs up to a maximum of ;

(4) In the third year following the year in which qualified agricultural costs are incurred, ten per cent of the qualified agricultural costs up to a maximum of ; and

(5) In the fourth year following the year in which qualified agricultural costs are incurred, ten per cent of the qualified agricultural costs up to a maximum of .

(b) No other credit may be claimed under this chapter for qualified agricultural costs for which a credit is claimed under this section for the taxable year.

(c) The amount of the qualified agricultural costs eligible to be claimed under this section shall be reduced by the amount of funds received by the taxpayer during the taxable year from the irrigation repair and maintenance special fund under section 167-24.

(d) The cost upon which the tax credit is computed shall be determined at the entity level. In the case of a partnership, S corporation, estate, trust, or other pass through entity, distribution and share of the credit shall be determined pursuant to section 235-110.7(a).

If a deduction is taken under section 179 (with respect to election to expense depreciable business assets) of the Internal Revenue Code, no tax credit shall be allowed for that portion of the qualified agricultural cost for which a deduction was taken.

The basis of eligible property for depreciation or accelerated cost recovery system purposes for state income taxes shall be reduced by the amount of credit allowable and claimed. No deduction shall be allowed for that portion of otherwise deductible qualified agricultural costs on which a credit is claimed under this section.

(e) If the credit under this section exceeds the taxpayer's net income tax liability for the taxable year, the excess of the credit over liability shall be refunded to the taxpayer; provided that no refunds or payments on account of the credits allowed by this section shall be made for amounts less than $1.

All claims for a tax credit under this section, including amended claims, shall be filed on or before the end of the twelfth month following the close of the taxable year for which the credit is claimed. Failure to comply with the foregoing provision shall constitute a waiver of the right to claim the credit.

(f) The director of taxation:

(1) Shall prepare any forms that may be necessary to claim a credit under this section;

(2) May require the taxpayer to furnish information to ascertain the validity of the claim for credit made under this section; and

(3) May adopt rules pursuant to chapter 91 to effectuate this section.

(g) Prior to claiming the tax credit under this section, the taxpayer shall obtain a letter from the department of agriculture specifying the qualified agricultural costs in the taxable year the tax credit will be claimed. The taxpayer shall provide information required by the department of agriculture prior to the issuance of the letter.

(h) The department of agriculture, in consultation with the department of taxation, shall annually determine the information necessary to provide a quantitative and qualitative assessment of the outcomes of the tax credit. Every taxpayer, no later than the last day of the taxable year following the close of the taxpayer's taxable year in which qualified costs were incurred, shall submit a written statement to and certified by the department of agriculture. Failure to provide the information shall result in ineligibility and a recapture of any credit already claimed for that taxable year. The amount of the recaptured tax credit shall be added to the taxpayer's tax liability for the taxable year in which the recapture occurs.

Notwithstanding any law to the contrary, a statement submitted under this subsection shall be a public document.

(i) The department of agriculture, in consultation with the department of taxation, shall annually submit a report evaluating the effectiveness of the tax credit. The report shall include but not be limited to findings and recommendations to improve the effectiveness of the tax credit to further encourage the development of agricultural businesses.

(j) As used in this section:

"Agricultural business" means any person with a commercial agricultural, silvicultural, or aquacultural facility or operation, including:

(1) The care and production of livestock and livestock products, poultry and poultry products, apiary products, and plant and animal production for nonfood uses;

(2) The planting, cultivating, harvesting, and processing of crops; and

(3) The farming or ranching of any plant or animal species in a controlled salt, brackish, or freshwater environment;

provided that the principal place of the agricultural business is maintained in the State and more than fifty per cent of the land the agricultural business owns or leases, excluding land classified as conservation land, is important agricultural land.

"Important agricultural lands" means lands identified and designated as important agricultural lands pursuant to part III of chapter 205.

"Net income tax liability" means income tax liability reduced by all other credits allowed under this chapter.

"Qualified agricultural costs" means expenditures for:

(1) The plans, design, engineering, construction, renovation, repair, maintenance, and equipment for:

(A) Roads or utilities, primarily for agricultural purposes, for which the majority of the lands serviced by the roads or utilities, excluding lands classified as conservation lands, are important agricultural lands;

(B) Agricultural processing facilities in the State, primarily for agricultural purposes, that process, harvest, treat, wash, handle, or package a majority of crops or livestock from agricultural businesses;

(C) Water wells, reservoirs, dams, water storage facilities, water pipelines, ditches, or irrigation systems in the State, primarily for agricultural purposes, for which the majority of the lands serviced by its water, excluding lands classified as conservation lands, are important agricultural lands; and

(D) Agricultural housing in the State, primarily for agricultural purposes; provided that:

(i) The majority of the housing units are occupied by farmers or employees for agricultural businesses and their immediate family members;

(ii) The housing units are owned by the agricultural business;

(iii) The housing units are in the general vicinity, as determined by the department of agriculture, of agricultural lands owned or leased by the agricultural business; and

(iv) The housing units conform to any other conditions that may be required by the department of agriculture;

(2) Feasibility studies, regulatory processing, and legal and accounting services related to the items under paragraph (1);

(3) Equipment, primarily for agricultural purposes, used to cultivate, grow, harvest, or process agricultural products by an agricultural business; and

(4) Regulatory processing, studies, legal, and other consultant services related to obtaining or retaining sufficient water for agricultural activities and retaining the right to farm on lands identified as important agricultural lands."

SECTION 9. There is appropriated out of the general revenues of the State of Hawaii the sum of $ or so much thereof as may be necessary for fiscal year 2008-2009 for the department of taxation to administer the important agricultural land qualified agricultural cost tax credit.

The sum appropriated shall be expended by the department of taxation for the purposes of this Act.

SECTION 10. There is appropriated out of the general revenues of the State of Hawaii the sum of $ or so much thereof as may be necessary for fiscal year 2008-2009 for the department of agriculture to administer the important agricultural land qualified agricultural cost tax credit and for one full time equivalent planner position for the department of agriculture.

The sum appropriated shall be expended by the department of agriculture for the purposes of this Act.

PART V

SECTION 11. Financing is also a critical component of the long-term viability of agriculture on important agricultural lands in the State. The legislature finds that it is in the public interest to assist agricultural producers in meeting their financing needs for projects that are located on important agricultural lands.

The purpose of this part is to further implement Act 183, Session Laws of Hawaii 2005, by authorizing the chairperson of the board of agriculture to guarantee loans relating to agricultural projects located on important agricultural lands.

SECTION 12. Chapter 155, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§155‑ Loan guaranty; important agricultural lands; agricultural and aquacultural loans. (a) The chairperson of the board of agriculture may guarantee loans made by commercial lenders, authorized to do business in this State, to agricultural producers for the purpose of developing and implementing agricultural projects; provided that the chairperson of the board of agriculture determines that:

(1) The agricultural projects are located on lands designated as important agricultural lands pursuant to part III of chapter 205;

(2) The commercial lender has completed its due diligence in approving the loan, including ensuring adequate collateral; and

(3) After consultation with the director of finance, the State possesses sufficient funds to provide an appropriate reserve for the loan guaranty and which, in the director of finance's judgment, are in excess of the amounts necessary for meeting the immediate requirements of the State and will not impede or hamper the fulfillment of the financial obligations of the State.

The chairperson of the board of agriculture may impose other conditions that the chairperson deems reasonable to implement the loan guaranty.

(b) In addition to the conditions that the chairperson of the board of agriculture may impose under subsection (a), any loan guaranty made pursuant to this section shall meet the following conditions:

(1) For a loan that finances operating costs, the maximum term of the loan shall be ten years;

(2) For a loan that finances capital improvement costs, the maximum term of the loan shall be twenty years;

(3) The interest rate charged on a loan shall be one per cent below the commercial lender's prime rate for as long as the loan guaranty is in effect;

(4) The loan guaranty may be up to eighty-five per cent of the outstanding principal amount of the loan, but shall not include any fees or accrued interest associated with the loan or its collection; and

(5) The principal amount of the loan shall not exceed $2,500,000.

(d) As used in this section:

"Agricultural producer" means a farmer, cooperative association, or landowner who derives at least fifty per cent of its gross income from agricultural or aquacultural activities.

"Agricultural project" means a project relating to agricultural or aquacultural operations or capital improvements."

PART VI

SECTION 13. Section 174C-31, Hawaii Revised Statutes, is amended by amending subsections (e) and (f) to read as follows:

"(e) The department of agriculture shall prepare a state agricultural water use and development plan for agricultural uses in the State in accordance with chapter 167 and this chapter, and subsequently modify and update the plan as necessary. The state agricultural water use and development plan shall include but not be limited to a master irrigation inventory plan which shall:

(1) Inventory [~~the~~] public and private irrigation water systems;

(2) Identify the extent of rehabilitation needed for each system;

(3) Identify sources of water used by agricultural operations and particularly those on lands identified and designated as important agricultural lands under part III of chapter 205;

(4) Identify current and future water needs for agricultural operations on lands identified and designated as important agricultural lands under part III of chapter 205;

[~~(3)~~] (5) Subsidize the cost of repair and maintenance of the systems;

[~~(4)~~] (6) Establish criteria to prioritize the rehabilitation of the systems;

[~~(5)~~] (7) Develop a five-year program to repair the systems; and

[~~(6)~~] (8) Set up a long-range plan to manage the systems.

The commission shall coordinate the incorporation of the state agricultural water use and development plan into the state water projects plan.

(f) Each county water use and development plan shall include but not be limited to:

(1) Status of water and related land development, including an inventory of existing water uses for domestic, municipal, and industrial users, agriculture[,] and particularly those designated as important agricultural lands under part III of chapter 205, aquaculture, hydropower development, drainage, reuse, reclamation, recharge, and resulting problems and constraints;

(2) Future land uses and related water needs; and

(3) Regional plans for water developments, including recommended and alternative plans, costs, adequacy of plans, and relationship to the water resource protection and water quality plans."

PART VII

SECTION 14. Chapter 205, Hawaii Revised Statutes, is amended by adding a new section to part III to be appropriately designated and to read as follows:

"§205‑ Agricultural processing facilities; permits; priority. (a) Any agency subject to this chapter or title 13 that issues permits shall establish and implement a procedure for the priority processing of permit applications and renewals, at no additional cost to the applicant, for agricultural processing facilities that process crops or livestock from an agribusiness. The majority of the lands held, owned, or used by the agribusiness shall be land designated as important agricultural lands pursuant to this part, excluding lands held, owned, or used by the agribusiness in a conservation district.

Any priority permit processing procedure established pursuant to this section shall not provide or imply that any permit application filed under the priority processing procedure shall be automatically approved.

(b) As used in this subsection, "agribusiness" means a business primarily engaged in the care and production of livestock, livestock products, poultry, poultry products, apiary, horticultural or floricultural products, or the planting, cultivating, and harvesting of crops or trees."

SECTION 15. Chapter 321, Hawaii Revised Statutes, is amended by adding a new section to be appropriately designated and to read as follows:

"§321‑ Agricultural processing facilities; permits; priority. (a) Any agency subject to this chapter or title 19 that issues permits shall establish and implement a procedure for the priority processing of permit applications and renewals, at no additional cost to the applicant, for agricultural processing facilities that process crops or livestock from an agribusiness. The majority of the lands held, owned, or used by the agribusiness shall be land designated as important agricultural lands pursuant to part III of chapter 205, excluding lands held, owned, or used by the agribusiness in a conservation district.

PART VIII

SECTION 16. The legislature declares that this Act establishes incentives for the designation of important agricultural lands in satisfaction of section 205-46, Hawaii Revised Statutes, and section 9 of Act 183, Session Laws of Hawaii 2005.

PART IX

SECTION 17. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 18. This Act shall take effect on July 1, 2020; provided that sections 2, 3, and 8 of this Act shall apply to taxable years beginning after December 31, 2019.

HOUSE OF REPRESENTATIVES	H.B. NO.	2357
TWENTY-FOURTH LEGISLATURE, 2008		H.D. 1
STATE OF HAWAII		S.D. 1