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Chipping Away at the Tax Base

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By Lowell L. Kalapa

There is no shortage of bills that want to grant this or that tax exemption, credit or exclusion to keep constituents happy all in the name of economic recovery.
There are the developers of Ko’Olina who want a 100% tax credit for investments in projects associated with the University of Hawaii, then there are those who want to expand the construction and renovation tax credit so that it applies to all commercial property, and then there are those live performers who want all the income they receive from doing live performances excluded from the state income tax. That’s just the tip of the iceberg. There are tax credit proposals that would reward anyone who goes for a health screening once a year.
Each supplicant has what seems to be legitimate reasons for asking for a tax holiday or break. In most cases, the point has been made that lawmakers “took care” of one industry why not this or that one. They point to the high technology incentives, the tax credits for residential and hotel construction, exemptions for aircraft maintenance, and so on. It would only seem fair that if a tax break was given to one constituent group, the same kind of tax favoritism should be conferred on other groups. The problem is where does the legislature draw the line?
A couple of million here and a couple million there and soon it adds up to real money. And while lawmakers like to believe that a tax credit for this or that industry is going to stimulate the economy and benefit all taxpayers, let’s get real and understand that these tax holidays come at the expense of all taxpayers. For example, one of the committees heard a proposal to accelerate the de-pyramiding of the general excise tax so that the 0.5% rate could be realized within the next year.
De-pyramiding of the general excise tax is the proposal that would lower the tax rate on services which are purchased for re-sale so that those services would be accorded the lesser 0.5% rate that is allowed goods which are purchased for further re-sale. While that is an idea that would help all sorts of taxpayers, it was noted that lawmakers specifically phased-in the reduction in the rate over seven years because the state could not afford the measure’s immediate loss of revenues that going to the 0.5% would involve.
Yet since that measure was adopted in 1999, the legislature has seen fit to adopt other specific tax break measures like the hotel and residential construction and renovation tax credit and the various high technology tax credits and exclusions. With each narrow tax incentive measure adopted, lawmakers reduce the potential for enacting broad tax relief.
Last year the administration proposed dropping income tax rates once more. The idea was rejected because lawmakers did not believe they could afford the additional loss of revenues. This year the administration has proposed lowering the capital gains tax rate over a period of four years. However, in order to accomplish that, the administration has offered that the liquor tax has to be increased.
So the fact of the matter is that while broad-based tax relief is desirable, lawmakers and administration officials have thwarted any of those efforts by giving away this or that tax break to selected people or activities. This is called erosion of the tax base, chipping away at the taxable base so that what remains must continue to pay the high burden of taxes.
Many of these so-called economic incentives do nothing more than confer a tax preference on certain taxpayers. Take for example the residential construction and renovation tax credit. If you rent, it won’t help you. If you don’t have the money or can’t get the financing or, for that matter, if you just lost our job, you can’t take advantage of the credit. Proponents argue that it will stimulate construction activity and thus pump money back into the economy. That only works if people have confidence they will have a job next week. As long as consumers lack that confidence, they will hold back and save rather than spend.
If there is one way public confidence can be restored it is to put money back in the hands of consumers. An across-the-board tax cut is one way lawmakers can put that money into the hands of consumers. So instead of trying to sate this or that specific constituency, lawmakers need to take a much broader look at the landscape and enact tax reductions that benefit all taxpayers. Additional targeted tax breaks will only make that goal more elusive and therefore economic recovery will be all that more difficult.

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