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Yes, and There Are Those Who Don’t Understand the Economy

posted in: Weekly Commentary 0
By Lowell L. Kalapa

Last week we took a look a some of the legislative proposals that attempt to address the problems facing the state’s economy by tweaking the tax system. This week, let’s take a look at some of the tax proposals that obviously don’t understand how the economy works.

One of the measure still alive for the duration of the session is a proposal that would increase the percentage of business entertainment expenditure allowed to be deducted against the net income tax. Under the federal law, up to 50% of a business entertainment expense may be deducted against adjusted gross income. Since it is the practice of the state to maintain conformity, that is similarity, between the federal and state income tax laws, Hawaii also allows 50% of business entertainment expenses to be deductible.

However, some lawmakers seem to believe that if the percentage is increased, business people will go out and spend more on entertainment of their clients. In fact, that is what SB 59 proposes to do, to increase the amount that would be allowed to be deducted from 50% to 80%. The increased amount that could be deducted, these lawmakers reason, would encourage business people to go out and spend more money in restaurants which in turn would keep waiters and bus people working and those restaurants operating.

And in fact, it was interesting to see who came to testify in support of the measure. An eclectic group it was, ranging from the state chamber’s small business council and the Hawaii business league to union representatives and the former chair of the Democratic party. No doubt these supporters really believe that if the ante is upped insofar as the tax benefit, taxpayers will respond.

However, the point that seems to have been lost on the proponents of the measure is that first, unless the federal law is changed to the higher deductible percentage, the state change will have rather little impact as the real benefit would be at the federal level where the income tax rates are much higher. Second, if companies are not profitable, there is little likelihood that there will be a marked propensity to increase their business entertainment expenses.

This latter point is crucial. Until businesses in Hawaii can realize a profit in this business environment, it is doubtful that they will spend any more than is necessary to stay in business. With high overhead costs from workers’ compensation insurance, prepaid health care that may be increased in cost becaused of the proposed shift in no-fault coverage, to high site costs, the pyramiding of the general excise tax, and high labor costs (remember this is the legislature that wanted to increase the minimum wage) it is not at all surprising that businesses have pared down discretionary expenditures such as business entertainment.

The point of the matter is that until the legislature recognizes that the overall business climate must be improved, including a reduction in the tax burden carried by businesses in this state and the regulations with which they must contend, the outlook is not going to improve. If businesses can’t make a profit, they go out of business, period! If they go out of business they take with them the jobs Hawaii’s people need.

Dangling an increase in the amount that can be deducted for business entertainment expenses just isn’t going to cut it. Juxtaposing that against the proposals, for example, that would take away the rest of the food tax credit thereby raising taxes, makes one wonder if the legislature really understands economics and what makes this state grow!

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