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Understanding the Economic Reasons Versus the Tax Policy Reasons

posted in: Weekly Commentary 0
By Lowell L. Kalapa

We lied. At least it would seem so.
At a number of post session presentations, we prognosticated with such certainty that the measure granting the local airlines an exemption from having to pay the general excise tax on their leases of aircraft and aircraft equipment would be vetoed.
Those statements were predicated on the fact that a very similar – in concept – bill was vetoed last year. At the time, the reasons given for the veto focused “on the fact that there is no justification for providing an income tax credit to lessees of an aircraft for rent paid to a lessor. In addition, there is no justification to single out the airline industry for this tax benefit, much less a single airline; every business that rents equipment should be equally deserving of a tax credit if that is the tax policy call. The approval of this tax credit is bad tax policy and sets a precedent for other taxpayers to seek similar tax benefits for their industries that have no justifiable bases.”
So it seemed that the Governor would again veto what was a very similar bill aimed only at the airlines. Even one of the Governor’s usual allies in the media trounced the measure in a column published in a local weekly calling the measure “among the worst” passed by the legislature this year. The columnist went on to characterize the bill as “redistribution of wealth to business and the rich, instead of to the poor.”
So when the Governor signed the bill into law, everyone was surprised. What had changed the Governor’s mind on this particular issue? The reason given this year is that unlike last year’s bill, this year’s measure applied to all airlines and not just one airline. While the press release did not address the other points made last year about singling out one industry or that every business that leases equipment should be given the same break, one only has to wonder if somehow the Governor saw the other side of the argument, the economic side.
Certainly, while the idea of granting such a narrow preference flies in the face of good tax policy, one also has to weigh the economic impact of a tax on certain activities. In this case, the imposition of the general excise tax came about as a result of an audit by the tax department. After years of leasing aircraft equipment to the local airlines, the department decided that the out-of-state lessor had nexus or presence in the state and was therefore subject to the state’s general excise tax. The airlines, on the other hand, believed that since the vendor was located outside the state and services were not subject to the state’s use tax law, there was no tax due.
But the findings of the tax department determined that the presence of the equipment, in this case aircraft, in the state gave the vendor presence in the state. And since the contract with the airlines stated that the customer, the airlines, was responsible for any state or local taxes due, the tax had to be paid by the airlines.
And from a tax policy standpoint, one might argue that the tax break was not deserved. But when one realizes that Hawaii (along with Alaska) is one of the few states where one just can’t jump into a car and drive from one end of the state to the other, it becomes very apparent that increasing the cost of the only efficient mode of transportation will affect the cost of everything.
Not only will the cost of getting from one place to another be higher for passengers, but getting goods from one point in the state to another will also rise. If the cost of interisland transportation gets to a point where demand is lessened or reduced, the scale of inefficiency will rise, creating the dog chasing his tail as less volume translates in higher costs per unit. As costs rise, the cost of transporting goods and passengers will begin to show up in all aspects of island life.
Residents have witnessed the effects of dwindling traffic between the islands as the number of direct flights to the neighbor islands are reducing the demand for the transfer between Honolulu and the neighbor island destinations. Schedules have been cut back such that the frequency has skewed the travel schedules of those who usually fly between the islands to do business.
True, while providing this “tax break” may not seem to be good tax policy, in the long run, the exemption will help to insure that residents will continue to enjoy the efficiency and economy of interisland air service. Instead of being one of the “worst” bills of the 2001 session, this may have been one of the “best.”

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