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Commercial Construction Tax Credit Derails Further Tax Relief

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By Lowell L. Kalapa

“Me, too, Me too, Mommy!” is a cry we are all familiar with when one child gets something and the other wants one of the same thing as well. And that appears to be what is going on with the latest proposal that urges lawmakers to extend the tax credit for construction activity to commercial facilities. As readers will recall, the last special session of the 2001 legislature adopted tax credits for construction and renovation of residential property and hotel property. The idea behind the tax break is that construction activity is the fastest way to stimulate the economy if tourism is not going to turn around any time soon. In fact, the proponents of the commercial construction tax credit argue that the tax break will actually be revenue neutral, pumping more bucks back into the economy that will offset the losses generated by the tax breaks.
While that point has yet to be proven, what is known is that there will be revenue losses resulting from these credits for years to come because the tax credit is nonrefundable and can only be utilized to offset any income tax liability the taxpayer may have. Given the soft economy, it is doubtful that the tax credit will be utilized in the near future, but what is certain is that those taxpayers who are fortunate enough to qualify will be able to pay little, if any, taxes whenever their businesses turn profitable.
While that may sound like a good deal, what it means is that those of us taxpayers who are not fortunate enough to be able to claim one of these tax credits will have to continue paying our taxes so that state government can continue to operate. And that’s the problem with these selected tax credits. Only those people who are able to jump through the right hoops will get tax relief, the rest of us will continue to pay the higher burden of taxes.
Ah, they might argue that by constructing and renovating these favored taxpayers are stimulating the economy. Well, the same can be argued about cutting taxes across the board. If your employer didn’t give you an increase in your pay, be it an hourly or monthly rate, you still took home more money in your last paycheck than you did back in December of 2001. This is because between the cut in federal and state income tax rates, your employer actually had to withhold less from your paycheck than he did last year. So now you have more bucks to spend on dinner out this week or now you can buy the DVD player you were saving up for last year.
With across the board tax cuts, everyone benefits. Everyone gets a little more to spend and collectively, there is more money put back into the economy. With selected or targeted tax breaks, only those people who are covered by the legislation will get the benefits or tax breaks.
Because there is a loss of tax dollars as a result of these breaks, the state treasury grows just a little bit smaller while the demands for those resources, that is state spending, continues to grow. With less revenues and more spending, the tax burden on everybody else has to remain high. So instead of raising all boats with the rising tide, only those boats of the right shape or size will rise while all the others sink.
So while it would make sense from an equity point of view to add commercial construction activity to the class of favored activities since lawmakers have already given it to hotels and residential property, it should be recognized that adopting another favored tax break forestalls the possibility of lowering taxes for everyone. While the jury is still out as to whether or not these tax credits for construction really stimulate the economy, it seems more than obvious that putting more money back into every family’s wallet will put a lot more money back into the economy.
Instead of extending these tax breaks to more targeted groups, lawmakers should start thinking about lowering the overall tax burden for everyone. Reducing that overall tax burden will have beneficial effects not only for families but for the overall perception of Hawaii as a place to invest and to do business. If there is anything that Hawaii needs now it is an infusion of new investment dollars. Hawaii residents saw what the investment of Japanese yen did for employment in the early 1990’s and we continue to yearn for those days.
However, that kind of investment will never return if the perception is that Hawaii remains a high tax burden state and unfriendly to new investment. Lowering the overall tax burden is the first and most important step to economic recovery.

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