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Drawing the Line on Tax Credits

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By Lowell L. Kalapa

As the dust cleared last week, it has become very obvious that the right hand doesn’t know what the left hand is doing. As noted in last week’s column, lawmakers are trying to deal with a crisis in the state budget, not enough money coming in and too much spending.
But you wouldn’t know it if you saw some of the tax breaks lawmakers are approving at this point in the session. It seems lawmakers believe tax credits are the panacea for what ails the economy. A tax credit here and a tax credit there, it seems everyone has a hand out for a tax credit.
One of the largest identifiable begs for a tax break comes from the people who bring us Ko’Olina on the Ewa plain. The developer of Ko’Olina wants taxpayers to give a tax credit equal to 20% of an investment made in that area for each of five years. If you are really good with your high school math, you have already figured out that 20% each year for five years means that the tax credit will equal 100% of the amount invested. There is a cap of $100 million on the amount of the investment that can qualify for the tax credit. However, that is a cap on each taxpayer and not a cap on how much can be claimed in toto.
Now the proponents argue that the investment would be limited to amenities or attractions for educational or promotion purposes in the Ko’Olina geographic area and that the development would be done in consultation with the University of Hawaii. So it sounds like the investment might be in something like an aquarium or perhaps a zoo which would be both educational as well as an attraction.
Further, the proponents argue that the state shouldn’t look at this proposal as a revenue loss because so many jobs will be generated by the construction activity both directly for the investment as well as for the surrounding community which could build either residences or hotel facilities. Some very prominent officials from both political parties seem to miss the point that these tax credits amount to a hand out of tax dollars that you and I have to kick into the state treasury. And while they will be paid with tax dollars, the taxpayer won’t even own the facilities.
And what about fairness? What if there was a developer on Maui or Kauai or even on the Big Island who if they just had a major public attraction next to their development would also be able to build more homes or more hotels? Will those developers come in next year saying, “Me, too!”?
That’s not the only bill that attempts to give away your hard earned tax dollar. Now that lawmakers have adopted a tax credit for hotel construction and remodeling and another for residential construction and remodeling, commercial developers have come in saying “Me too!” A bill making its way through the legislative maze would extend tax credits for construction and renovation of commercial facilities. The tax would be 4% if the project is less than $10 million and 10% if the total project cost was more than $10 million.
And why shouldn’t lawmakers consider giving these developers a tax credit like they gave hotels? Fair is fair, you give one taxpayer, you should give all taxpayers. But wait a minute, who is going to pay for all these tax credits? Ok, they say that the dynamic effect of all the activity created by the new jobs will produce even more tax revenues.
But if you are an investor and the numbers don’t pencil out that you will be able to make a profit, will the tax credits indeed be enough to persuade you to move ahead on a development? Further, if a developer can’t get the financing for a project, tax credits won’t make a difference. So, in the broad picture, a tax credit will really benefit only those developers and investors who are already ready to roll on their projects. They have the financing and have worked out the numbers that they will be able to make a profit and the tax credit is merely gravy to add to the bottom line.
Meanwhile the construction worker for whom these credits are supposed to create employment will still have to struggle with the high income tax rates and continue to pay the 4% on all purchases. So the working stiff will continue to struggle with the high tax burden just so he or she can have a job building or renovating a hotel or commercial facility.
It would seem that lowering tax credits across the board for all taxpayers would not only be fairer, but also do much more to stimulate the economy than all of these narrow tax credits.

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