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Tax Incentives Prevent Overall Relief

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By Lowell L. Kalapa

As the 2001 legislative came to a close, many observers bemoaned the fact that some good proposals to alleviate the tax burden especially on the low income families got lost in the shuffle. These included an increase in the standard deduction and the re-establishment of a tax credit mechanism that would address the regressivity of the general excise tax. And although still subject to much debate, lawmakers also failed to adopt and earned income tax credit for the working poor with dependents.
These proposals succumbed due largely to the lack of resources or revenues to offset the loss that these proposals would create if they had been adopted. Spending demands resulting from public employee pay raises as well as for the court-ordered consent decree for special needs students preempted any possibility of providing tax relief this year. . . or did it?
True, as some lawmakers noted, the income tax rates were reduced a couple of years ago in an effort to help “jump start” the economy after years of downturn. And in fact, senators thought it might necessary to take back to those income tax cuts so that they would have enough money to pay for public employee pay raises. Lucky for the taxpayer, that wasn’t necessary. However, there is no doubt that the tax system is not producing the same level of revenues as it previously did.
While one reason is that the economy is not as robust as it was during the “bubble period” of the late 1980’s, another has to be the fact that lawmakers have eroded the tax base bit by bit over the years. “Eroded” in the sense that the tax base has been chipped at and carved out with special exemptions, exclusions, and credits. Take for example, the tax credit that lawmakers approved this year to compensate architects, engineers, pest control operators and contractors for their “contribution” of in kind services to help move along the back log of school repairs and maintenance. The tax credit will be equal to 10% on up to $40,000 of contributed in- kind services or a maximum allowable annual tax credit of $4,000 per professional. While it doesn’t seem like much, if a 1,000 professionals were able to claim the maximum credit, that would be $4 million in lost revenues. That doesn’t seem like much against the state’s $7 billion dollar budget, but then again, it is not the only tax incentive on the books. As they a million dollars here and a million dollars there and soon it adds up to real money.
Another $4 million hit on the state general fund is the alternate energy tax credits. These credits vary in amount depending on the type of alternate energy device. The most common alternate energy device is the solar water heaters which qualify for a 35% tax credit. The ice storage alternate energy device qualifies for a 50% tax credit. While some of the newer technologies have been added to the tax credit provisions only recently, the solar heater credit has been on the books for nearly 25 years.
Then there is the hotel renovation tax credit which provides those who construct new or renovate old hotel facilities a tax credit equal to 4% of the cost of that activity. Proponents claim that the 4% tax incentive is just what will make an owner undertake such a renovation. Of course it is interesting to note that when adopted, the credit was made retroactive so it would apply to some owners who had already under taken some renovation or construction.
A more recent phalanx of tax incentives is aimed at attracting high technology activities to Hawaii. With no rhyme or reason other than the aura the high tech industry seems to attract. This will be the third year running that tax incentive legislation has been adopted by the legislature. How much more tax incentives will be necessary is anyone’s guess especially in light of the fact that when industry representatives are asked to define what constitutes qualified high technology activities, everyone has a different answer.
While the actual revenue loss or impact of some of these more recently adopted tax incentives has yet to be assessed or reported, there is no doubt a million dollars here and there has contributed to the smaller growth in tax revenues. Thus, while lawmakers have a difficult time cutting expenditures, they also have no trouble spending out the “back door” with tax breaks for select groups of taxpayers.
The result is that some taxpayers get “tax relief and tax breaks” at the expense of all taxpayers. In this case, these tax breaks came this year at the expense of the poor and low income families of our community.

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