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Making Someone Else Pay is the Result of Targeted Tax Incentives

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By Lowell L. Kalapa

In recent years as the legislature has struggled to address our sagging economy, lawmakers have resorted to adopting targeted tax incentives with the thought that if they can encourage a certain activity, it will stimulate the economy or start up a new industry that will benefit the economy.

While a tax incentive for this or that industry makes good material for campaign brochures and media headlines, there is also the down side of what those tax incentives represent. Since tax incentives mean that the beneficiary is going to get some sort of tax break, it means that much less in taxes will be paid as a result of the activity.

And if habits continue as they have in the past, elected officials like to spend the money they get from taxes. This means that if some taxpayers get a break and are excused from paying their share of taxes and spending continues to increase, someone else has to pick up the slack. Thus, targeted tax breaks without commensurate reductions in spending mean higher taxes for everyone else.

Now proponents will argue that new economic activity is better than none. But the problem with that argument is twofold. First of all, by granting a targeted tax incentive, policy makers are admitting that the tax climate is not conducive or works against the targeted activity. If that is the case for the targeted activity, then what does it say about the tax climate for those who are already doing business in Hawaii? If elected officials are willing to “give away” some of the store in foregone tax revenues for the targeted activity, why not reduce the tax burden across the board so that everyone can benefit?

The second point is that how do lawmakers know that this particular activity is THE right one for Hawaii? For example, is high technology the industry that will spur the economy, or is it just one of many new industries that Hawaii needs to diversify its economic base? With so many other states competing for high technology industries, is Hawaii well advised to enter into a competition that it is ill-equipped to battle?

It seems that elected officials have become preoccupied with the “sexy” attractive issues or industries that will grab headlines while ignoring some of the basic needs for businesses to survive. Instead of reducing and eliminating barriers to entrepreneurship, more time is spent on exploring the popular attention-getting types of activities.

Call it back to basics or understanding what makes the economy run, elected officials need to understand the underlying foundation of a good business climate that supports economic growth and the creation of jobs that Hawaii’s people need if they are to survive and remain in the islands. Temporary tax incentives for a few selected industries do not contribute to an overall business climate that is conducive to a thriving economy.

Over the years, government in Hawaii has found every conceivable way to make it difficult to start up a business, be it regulations, forms to fill out, insurance coverages, health standards or whatever. Well intended as they may be, these rules and regulations add to the cost of doing business in Hawaii. Why should one want to start a business in Hawaii when there are places on the mainland that don’t impose the same kind of restrictions and regulations with the temerity and zealousness that government agencies in Hawaii seem to pursue?

More than anything else, lawmakers seem to have an aversion to what is critical to any and all business no matter where they are located and it is this thing called “profit.” Elected officials seem to think that if one makes a “profit” in business, that business must be “ripping off” its constituents. Making more than what it costs to produce a product or service is seen as somehow uncaring or obscene.

Anyone who has ever run a business knows that if you don’t make a profit, you don’t stay in business. No one who has ever started a business has started that business with the idea of losing money or selling his or her product or service for exactly what it costs to make or produce. Profits, as businesses know, are necessary if a new job is to be created or the product lines are to be expanded or a new store is to be opened.

Instead of jumping on the tax incentive bandwagon, lawmakers and other elected officials need to take a refresher course in basic economics and perhaps be required to set up their own businesses just to see how difficult it is to do so in Hawaii because of the myriad of laws with which every business has to contend. Maybe they just might think twice about the value of tax incentives versus improving the business climate for everyone.

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