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Granting Targeted Tax Incentives Creates Problems

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By Lowell L. Kalapa


As lawmakers race toward adjournment under pressure to pass some sort of tax relief, there are a few measures which raise the question of validity.
 

 

 

Unfortunately, the high cost of living and doing business cannot be addressed by providing targeted tax incentives like these proposals would.

       These are measures which would provide targeted tax relief or some sort of special handling of tax dollars. Among those measures are proposals to grant an income tax credit to small businesses for amounts that they spend on advertising during 1998 over and above what they spent for advertising in 1997. The credit would be good for the next several years.

Another credit would be given to small businesses and homeowners who undertake renovation projects. The credit would be equal to 50% of the cost of planning fees charged by architects, interior designers, decorators, and planning consultants licensed to do business in the state as long as those costs are associated with a renovation or redecorating project of a small business or homeowner. Note well, that the credit is not given for the actual renovation or redecoration of a property.

Commendable as the intent may be, it is difficult to rationalize some sort of relationship between the activity being rewarded and the reward of the credit itself. Unfortunately, the high cost of living and doing business cannot be addressed by providing targeted tax incentives like these proposals would. For those who qualify for the credits, they would provide an unwarranted benefit in the form of a credit, yet there is no indication that those activities did not have the ability to pay their fair share of the tax burden in Hawaii.

On the other hand, in order to afford the credit, lawmakers who don’t want to make cuts to state spending have to forego making other tax reductions. To a large degree this is also part of the problem that lawmakers are faced with as they attempt to provide the”big” and “bold” step of cutting taxes across the board as a means of stimulating the economy. For example, last year at the behest of the state administration, lawmakers adopted credits for motion picture and television producers and for hotel owners who renovated their properties within the next two years.

 

 

 

…in order to afford [targeted tax credits], lawmakers who don’t want to make cuts to state spending have to forego making other tax reductions…

       While these proposals seemed logical and commendable at the time and they got good press, no one questioned where the lawmakers were going to make up the money as a result of the revenue loss. But at the time, it seemed like a “cheap” quick fix of the economy. And if the incentives didn’t entice the activities, that is if they didn’t work – it wasn’t such a big thing because there would be no revenue loss, or so lawmakers were told.

But what about those targeted tax incentives that are being used? Another proposal last year grants an exemption from the general excise tax for those who provide aircraft maintenance and service. The exemption was also extended to the construction of an aircraft maintenance facility that was large enough to service “wide-body” or jumbo jets. This exemption was the “deal-maker” to attract Continental Airlines to locate a jumbo jet maintenance facility in Hawaii.

Because the measure was so poorly drafted by the scriveners in the business department that the law, as written, allows anyone who provides aircraft maintenance and service on jet planes to claim the exemption. The law also provides that anyone who provides such maintenance who brings into the state, goods or materials to service those jets or to build an aircraft maintenance facility, as defined, does not have to pay the state’s use tax.

Although the tax department attempted to close that loophole with legislation it introduced this year by allowing the exemption to only those who did the maintenance in a jumbo jet facility, it was pointed out that if the facility was large enough to provide maintenance to jumbo jets, then smaller aircraft could also be serviced and maintained in the facility. So lawmakers are trying to level the playing field.

However, when it was pointed out that the use tax exemption for materials and goods purchased by persons providing aircraft service and maintenance encouraged the purchase of goods from out-of-state vendors because there is no similar exemption under the general excise tax law, the tax department balked as did the House Finance Committee.

Unfortunately it is true, without a similar exemption under the general excise tax law, the legislature has given a preference to non-Hawaii businesses at the expense of local vendors who might be selling the same products or goods. Again, another example of how well intended targeted tax incentives can go awry.

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