Doubtful Benefits of Some Tax Credits

Recently it was revealed that a low-budget surfing film is to be the beneficiary of more than $16 million in high technology tax credits established by the 2001 session of the legislature. Because of the large number, the media flocked to the story attempting to find out who was going to make out big time as a result of these generous tax credits. Of course, when tax department officials were queried, the response was that kind of information could not be given out, nor could they confirm just how much would be given back to the lucky taxpayers.
Why not? Hawaii, along with numerous other states, has an agreement with the federal government to maintain confidentiality of tax information in return for the federal government’s willingness to share information about federal taxpayers with the state. This agreement helps states to track and audit taxpayers throughout the nation and possibly internationally should those persons have sources of income within the state.
But that is only one small point of today’s discussion. Confidentiality of information insures that the public does not know how much someone earns and how much in taxes that person pays the federal or state government. It also means that the public doesn’t know how much in tax benefits any one taxpayer claims, including tax credits.
And that’s the rub about tax credits. Lawmakers fall all over themselves trying to prove to their constituents they are doing something to help the economy by granting tax credits for this or that activity. They are really spending your tax dollar albeit through the back door. At a time when department heads pathetically decry cuts in state spending, lawmakers are entertaining tax credits which could give away as much, if not more, than what lawmakers need to find to balance the state budget.
Somehow over the years lawmakers, as well as taxpayers, have come to view tax credits as a panacea for whatever ails state government, be it getting drivers to secure youngsters into car seats or getting homeowners to install alternate energy devices on their roof tops. These tax credits have nothing to do with how much in taxes the taxpayer owes state government. Instead, tax credits have been viewed more as carrots to get the taxpayer bunny to hop in a certain direction.
When the first tax credits were adopted by lawmakers back in the late 1960’s, they were designed to alleviate or reduce the burden of taxes on those who could not afford to pay the full measure of taxes like the 4% on food for the truly poor. So a credit schedule was created that returned much of the 4% tax paid on essentials to those people at the bottom end of the scale.
But then enticed by the federal tax credits for alternate energy devices, lawmakers decided to mimic the federal tax credit for alternative energy devices and established the state alternate energy tax credit in the mid- 1970’s. Ever since then, the tax credit mechanism has been viewed as the magic bullet to solve all sorts of problems.
The problem with tax credits used in this manner, as the media discovered recently, is that no one knows exactly how successful the tax credit will be. As a result, no one – no not even the tax department – knows for sure how much in tax credits will be given out to qualifying taxpayers. While estimates can be made, there is no certainty as to how much will be drawn from the treasury. If the tax credit is refundable, state government actually cuts a check for any amount in excess of the taxpayer’s income tax liability for that year. This is money out the door. A nonrefundable tax credit insures that the state will forgo future tax revenues in the amount of the tax credit that is in excess of the taxpayer’s liability in the year for which the tax credit is claimed.
The real problem is that there is no accountability for the “expenditure” of these public funds. Once adopted, the money is gone. So like the $16 million, if that money had been appropriated, would taxpayers have been in support of that amount of money for a low-budget surfing movie?
While well intended, there is no assurance that the credit will have the desired outcome. That’s why the appropriation process is far more accountable. People can see what the money is going to be used for, who it will go to, and measure if the project was a success. And maybe that’s why lawmakers like to keep taxpayers (and the media) in the dark with tax credits.