Detour to Tax Relief Proposed by Lawmakers

As the deputy director of the department of business, economic development and tourism bemoaned the fact that making a film in Hawaii probably costs 20% to 30% more than making that same film elsewhere, the thought came to mind that perhaps lawmakers and administration officials really don’t understand what makes the economy grow.
The deputy director probably doesn’t realize that the higher cost of doing business is largely attributable not only to one of the highest tax burdens in the United States but also to the costly regulatory environment in which businesses must struggle in order to survive in Hawaii. And yet she like, many others, are contributing even more to that higher cost of doing business.
Last week when we discussed the plethora of tax breaks lawmakers are considering, it was pointed out how ridiculous that effort is in light of the fact that lawmakers are also scrounging for money to balance the state budget. The point of the matter is that on one hand lawmakers are looking for money while on the other hand they are giving money away in the form of tax credits.
This is being done in the name of economic stimulation and lawmakers are anxious to do something that they can claim as a victory or accomplishment on their campaign brochure. At the same time businesses who would derive a benefit from these tax breaks are egging lawmakers on to adopt these tax credits.
However, both lawmakers and businesses are missing the point that the more they whittle away at the tax resources of the state without concurrently reducing the amount of state spending will put taxpayers and the state on a collision course with financial disaster. If many of these credits are adopted, the revenue forecast will have to be downgraded to accommodate the anticipated revenue losses. If there are fewer resources and government spending continues to grow, there is no doubt that taxes will have to be increased.
Thus, instead of improving the business climate in Hawaii, it will get worse. Instead of reducing the cost of living and doing business in Hawaii, it will just get worse. Proponents of these tax credits chastise any criticism of the tax credit proposals because, of course, they will receive the direct benefits of the legislation.
But little do they acknowledge that they are shifting the tax burden to all the rest of us taxpayers.
Certainly lawmakers want instant gratification because they need to take something back to their constituents, but little do they understand that by adopting all of these tax breaks they are precluding themselves from the potential of lowering taxes for everyone – it could be reducing the general excise tax rate from 4% to 3% or dropping the top individual income tax rate from 8.25% to 7.25%.
There are already tax increases on the table from raising the liquor tax rates by 50% to increasing the tax on cigarettes by 20%. While many readers may think that’s ok because they are “sin” taxes, it should be remembered that this is an indication that there isn’t enough money to meet the payroll. If this continues and government doesn’t downsize, whose ox will be the next to be gored? Will income taxes have to be increased next year after the elections or will it be a proposal to increase the general excise tax or will it be that proposal to tax all nonprofits.
To a large degree, lawmakers are hoping that the economy will turn around in the next twelve months so that they can have all the money they want to continue on their merry way. But given the fact that taxes are being increased and tax breaks will continue to deplete the state treasury, there is little prospect that the economy will improve. Lawmakers don’t seem to get the point that if the environment in which businesses have to contend is not conducive, then no one will want to come to Hawaii to do business.
Let’s reiterate this point because it seems both businesses and lawmakers miss the point. Unless the business environment improves, which means lowering the tax burden and eliminating government hurdles created by costly regulations, the business climate will not improve. If the business climate is not attractive because it costs so much more to do business in Hawaii, then no new capital investments will be made in Hawaii.
With no new capital flowing into Hawaii, the economy will stagnate, no new jobs will be created, and no additional income will be generated. With no vibrant economy, lawmakers can expect little or no growth in tax collections and thus, they will be in the same pickle they are today. So much for improving the business climate.