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Another Tax Credit! Heaven Help the Tax System

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By Lowell L. Kalapa

In recent years, lawmakers here in Hawaii, as well as across the nation, have turned to tax credits as a way to address constituent complaints.
A recent article in Forbes Magazine highlights the absurdity to which both state and national lawmakers have resorted in adopting tax credits as a means of addressing issues. Many of these issues have nothing whatsoever to do with the tax system. For example, Hawaii adopted a tax credit for alternate energy systems nearly a quarter century ago and continues to offer it as a way to encourage constituents to use alternate forms of energy.
Does it have anything to do with the burden of taxes? Or does it address how much in taxes some pay? Of course not! It is nothing more than a taxpayer subsidy of someone’s purchase of an alternate energy device. Thus, the tax system is being used as a way to hand out public money.
As noted earlier, Hawaii lawmakers are not alone in abusing the tax system to satisfy constituent demands. For example, at the national level federal lawmakers want to adopt tax credits for everything from clean coal technology to energy efficient appliances as a way to address the concerns about the nation’s dependence on foreign oil.
Near and dear to many businesses in our own backyard is the proposal to offer a $1,000-per-family tax credit for vacation expenses to encourage Americans to travel again. What is interesting is that the travel industry argues that this tax credit proposal is not a bailout because the travel industry is not going to receive a dollar of government funds . . . . well sort of not going to receive those funds directly. Critics deride the subsidies that sugar got in the past and the tobacco growers and Chrysler when it was near bankruptcy, but no one seems to view tax credits as a bail out of the specific industry that will benefit indirectly from the tax credits.
As the article goes on to point out, states have come up with their own zany ideas as targets for tax credits. In California, for example, tax credits are awarded to teachers for their classroom work. A teacher qualifying for the credit can get up to $1,500 in tax credits based on their wages paid for classroom work. This amounts to nothing more than a backdoor pay raise where the teachers don’t even have to go out on strike.
In Arizona, the tax system plays a shell game to encourage contributions to private school scholarship funds. Taxpayers can make a contribution to a private scholarship fund and get a state tax credit equal to that contribution. Thus, not only is the taxpayer not out a single dime, but the taxpayer can also claim a charitable deduction against the federal income tax.
Lawmakers often view credits as a way to “cut” taxes without realizing that unless spending is cut, those tax credits amount to nothing more than additional spending of hard-earned tax dollars. Tax credits represent a backdoor approach to spending, enlarging the size of government by the amount the tax credit costs the public treasury each year. Because those are lost dollars that would otherwise have been spent on public services or programs, lawmakers find other ways to recapture those dollars. Thus, there is a shift in tax burden away from those so favored with a tax credit to those who aren’t high on the tax credit list.
Because these selected or targeted tax credits cost the treasury money, lawmakers are not able to lower tax rates across the board. Just think, if income tax rates could be lowered another percentage point or if the general excise tax rate could drop to 3% instead of the current 4%; the tax burden would be lessened for all and not just for the select few who can claim the variety of tax credits currently on the books.
For example, the recent special session of the legislature extended tax credits for construction and remodeling activity for hotels and residential property. They were adopted with the idea that the credits would spur construction activity and therefore stimulate the economy. However, the only people who are going to benefit from the tax credits are those who undertake the specific construction and, of course, the construction companies. Further, because it is unknown how many people will undertake renovation and construction, lawmakers won’t know how much this program will cost.
In the meantime we will all struggle with the high burden of taxes in Hawaii so that a few constituents can enjoy this tax break. And if there isn’t enough money, lawmakers might raise taxes.

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