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Figuring Out the Strategy

posted in: Weekly Commentary 0
By Lowell L. Kalapa


A review of just the tax bills introduced in this session makes one wonder if our lawmakers are anywhere near earth, let alone Hawaii.

One would think that all this talk about the poor economic outlook, job layoffs, and store closings would be reflected in proposals submitted for consideration. With the emphasis on lowering taxes and eliminating burdensome government regulation, you would think that there would be nothing but ideas to cut taxes and bills to repeal regulations.

 

 

  It is indeed scary to think that lawmakers are thinking up even more ways to raise the cost of living in Hawaii despite the fact that this state is facing the worst economic downturn in its short history.        With the call for bold actions to be taken by slashing income tax liabilities, you would expect that lawmakers would submit proposals to cut tax rates or raise the standard deduction or increase the personal exemption. And while there have been some bills which attempt a version of tax reform, the legislative hopper has been overwhelmed with tax credit proposals for everything but the kitchen sink. There are also proposals to raise taxes or give the counties the power to raise taxes while others propose new user fees or raising the rates of existing fees. For example, there is a proposal to grant an income tax credit for employment of school-to-work referrals, while another credit would be extended to landowners setting up a management conservation area. Still others would grant tax preferences for the establishment of high tech parks in certain areas of the state. Another bill would grant income tax credits for advertising costs of small businesses while still another would grant a credit if a small business renovates its offices.

Perhaps, these lawmakers believe that they are “helping” to improve the economy. Little do they realize that by adopting very narrowly focused tax “goodies,” they are reducing the prospects for overall reform of the tax system and broad-based tax relief for all taxpayers. Perhaps lawmakers are taking the lead from the administration which last year promoted all sorts of specialized tax relief.

For example, the administration sponsored specific tax credits for hotel renovations and motion picture and television film makers. The administration also promoted an exemption from the general excise tax for the building of an aircraft maintenance facility and for the activity of aircraft maintenance. Supposedly it was for one specific taxpayer so that the taxpayer would be encouraged to locate such a facility in the islands.

However, as was pointed out last year before the measure was approved, the legislation was so broad that it applied to anyone who did aircraft maintenance. As a result, the administration is back in this year trying to close the loophole. Unfortunately, it is a day late and a dollar short as it is difficult to take away something that has already been claimed.

The result is that what was supposed to have had a very minimal impact on state tax collections will contribute to the ever dwindling general fund resources. Should any of the very narrow tax incentives that have been introduced this year be adopted, those tax resources will continue to dwindle, making it more difficult to truly undertake massive reform of the tax system.

Let’s not forget the proposals to increase taxes. Most of the proposals have focused on the conveyance tax. Some attempt to change the allocation of the funds generated by this tax while others increase the rate of the tax and also change the allocation. Unfortunately, the primary beneficiaries of the conveyance tax have found out what was predicted when the tax rate was increased from five cents to ten cents in order to fund affordable rental housing and the natural area reserve program. The conveyance tax is highly volatile, responding to activity in the real estate market and the value of real property. With the slump in property sales, the collections have also taken a beating. Now those advocates either want to raise the tax or take more of the collections that are going into the general fund. Finally, let’s not forget the user fee, the tax of the 90’s. There are proposals galore, but the most prolific are the proposals to increase the fee imposed on the importation of glass containers. The 1.5 cent fee is the target of numerous suggestions to raise it. Little do lawmakers realize that this fee is nothing more than another tax that raises the cost of all the goods taxpayers purchase in the marketplace.

It is indeed scary to think that lawmakers are thinking up even more ways to raise the cost of living in Hawaii despite the fact that this state is facing the worst economic downturn in its short history. Is this an indication that lawmakers are indeed out of touch?

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