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Efforts to Hold the Line on Spending Threatened by Tax Spending

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By Lowell L. Kalapa

In the haste of the legislative session, it seems that lawmakers and observers alike lose sight of the overall picture as we become immersed, if not consumed, by our own issues.

Apparently, this is what is happening at the state capitol building where bills are moving through the legislative process without an overall picture of what is happening. While taxpayers may be aware of the outright expenditures, there are also expenditures that come through the back door called tax exemptions and credits.

For example, lawmakers want to give a tax credit to individuals who are certified in CPR skills. The original proposal would have granted each taxpayer who is certified during the year in CPR skills a $20 per person tax credit. If as some proponents state that there are 60,000 individuals certified in CPR skills each year, that would cost the state $1.2 million a year.

Then there is the tax exemption for diplomats who happen to visit our state. The state administration and the U.S. state department believe that Hawaii should grant diplomats passing though our state, as well as the consulates located in our state, an exemption from paying the general excise tax and the transient accommodations tax on their purchases. The argument is that all the other states levying those types of taxes grant diplomats an exemption from the sales tax and the hotel room taxes in their states.

However, as most businesses know, the tax is on the business and not on the customer even though the amount of the tax can be and is usually visibly passed on to the customer. In those states where there are sales taxes, the obligation or liability is indeed on the customer. If the customer refuses to pay the sales tax in those states, the revenue department goes after the customer and not the business.

The opposite is true in Hawaii. If the tax is not paid, it is the business that is slapped with all the legal stuff like liens and penalties. Thus, the general excise tax and the TAT are no different from the net income taxes that businesses have to pay. They are taxes that can be imbedded in the price of the goods or services sold to diplomats.

What is not readily apparent to the proponents of the exemption for diplomats is the compliance and administration costs of trying to keep track of what purchases were exempt and who is qualified for the exemption. How will businesses keep track and verify an exempt sale of say an aloha shirt? One sale in the midst of hundreds?

More importantly, why should diplomats be entitled to an exemption on their purchases and residents must pay the tax on their purchases? Will diplomats stop coming to Hawaii just because they are not exempt on their purchases? This is one proposal that just does not make any sense nor does it seem fair to other taxpayers who must continue to pay the tax.

Then there is the proposal that would increase the credit granted to television and film makers which is supposed to offset the cost of the general excise tax paid on purchases made in Hawaii. While there was some sort of rationale when the credit was set at 4%, the proposal currently before the legislature would up the amount of the credit to as much as 8%. At that point, the credit becomes a subsidy as it is greater than the amount of the general excise tax. However, the same question must be asked – why should film makers get a break when residents have to pay the tax on their purchases?

And most puzzling is a proposal to exempt call centers from the general excise tax or to allow call centers to locate in enterprise zones where there are both income tax and general excise tax holidays. It is especially curious given the fact that there are already call centers up and running in the state. So it can’t be that lawmakers want to provide a tax incentive to attract those activities to the state. Is this just another give away?

At a time when lawmakers are struggling to fund various public programs and in some cases dreaming up ways to raise new moneys through oddball fees and charges, they are literally throwing money down a deep dark hole on tax breaks that cannot be justified. Is there something wrong with this picture?

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