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Bits and Pieces Approach Insures Higher Taxes

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By Lowell L. Kalapa

Someone recently asked why tax incentives to attract certain types of activities were not an acceptable approach to improving the business and economic climate of the state. After all, shouldn’t the state be attracting new types of businesses to get the economy going again?

Those who advocate giving away tax incentives or tax breaks to attract new businesses to Hawaii should ask themselves why tax incentives are necessary. Why not give away free land or for that matter, cheap labor that is subsidized by the state? More often than not, you will hear the excuse that the taxes are too high in Hawaii and therefore tax incentives are needed to attract businesses. That statement is an indictment in itself that taxes are high, period! The point of the matter is that if taxes are too high to attract new businesses to Hawaii, then what does it say about taxes for businesses that are already here?

If it is also assumed that those businesses that take advantage of some tax incentive or tax break offered to attract them to Hawaii also continue to use or need public services, who will pay for those services? Obviously the unlucky suckers who don’t get tax breaks will have to pick up the tab. Proponents argue that the shift in tax burden is made up with the increased business activity, new investment dollars, and new jobs created by these activities.

But wait, when you think about it, if the tax burden continues to remain high for existing businesses who then must attempt to pass that tax burden on to their customers, wouldn’t the higher cost of living and doing business then be a reason to move out of Hawaii? Just because a certain type of business or activity gets a tax break does not insure that Hawaii will be an attractive place to do business. Ultimately, that new business will figure out that the cost of remaining in Hawaii is too high and making a profit is next to impossible.

So targeted tax incentives do little to improve the overall outlook for the state’s economy. What targeted tax incentives do is to shift the burden of taxes to others who are not so favored and makes the cost of living that much higher. It also highlights the fallacy that policy makers think they know what businesses should be attracted to Hawaii. By giving tax breaks to those industries selected by elected officials, those officials presume that they know better what types of businesses Hawaii needs.

However, by having to keep the tax burden high on all other businesses, those policy makers have precluded every other type of business known or unknown from relocating to Hawaii because the tax burden is so high. But catchy terms like “high-tech” and “enterprise zones” seem to be attractive to lawmakers and have a certain amount of public appeal. So tax incentives for these types of business sell to elected officials. After all, who ever heard of tax incentives for “mom and pop” stores?

But it is those very “mom and pop” stores that are the backbone of the state’s economy – they are the big businesses that have been around for over a hundred years and they are the small businesses that were started in the back of a neighbor’s garage. If lawmakers cannot see that it takes an overall business and tax climate that is conducive to allowing all businesses to make a profit, then everything is for naught.

Reducing that tax burden – and the regulatory burden – for all taxpayers is key to returning Hawaii’s economy to vibrancy and good health. “Taking care” of a few select taxpayers can only make the situation worse for everyone else.

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