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Generating Economic Activity Starts with the Basics

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By Lowell L. Kalapa

Try as they might, lawmakers fell short of achieving their stated goal of stimulating the economy with the measures they approved this past session.
Gimmicks and quick fixes seemed to be the only thing that lawmakers could come up with to stimulate the economy. Somehow lawmakers seem to believe that construction activity is supposed to be the panacea for the ailing economy as they seem to be fixated on tax credits to entice construction activity.
While some of that fervor was egged on by the construction industry and businesses who wanted to be able to feed at the same trough as hotel and resort owners who had been granted a similar tax credit by an earlier session of the legislature, it was quite obvious that these tax credits were not part of any bigger picture. There was no game plan. There was no grand scheme of how construction was going to fit into the overall picture of improving the state’s economy.
So all right, the logic is that if there is a financial incentive to undertake construction, that construction will mean all sorts of trades people and laborers will be employed. Then the next step of logic is that if they are employed and earning a pay check, then they will go out and spend that money so that others will be employed. Hey, that makes sense! Those people in turn will go out and spend that money and keep others employed.
Sounds good until one stops to think, where is all this money that will go into the construction of new buildings coming from in what is an otherwise “down” economy? Are businesses doing so well that they have the capital to build new facilities? And what happens when those facilities are built? Will there be tenants to occupy all that retail or industrial space?
Obviously the money that would go toward building these new facilities is not in the state, for if it was in state then more than likely the construction would have been undertaken long before now. No, either local owners would have to borrow the funds or find investors who would be willing to sink millions of dollars into new construction in Hawaii. Those investors, of course, are going to weigh the prospects of just how much of a return they will be able to earn on their investment. If the prospects are good than and there will be a fairly good return on their investment, then by all means, they’ll be willing to plunk down their hard-earned capital. If, on the other hand, that return on investment is going to be less than what they can earn elsewhere or if the return will take a very long time, the likelihood that capital will go elsewhere is greater.
And that is the point that our public policy makers and, yes, to some degree some business leaders seem to have missed in their rush to support these tax credits for commercial construction. If the tax and business climate isn’t as good as investors could find some other place, then the prospect of those investment dollars flowing to Hawaii is less than likely.
Instead of targeting only one type of activity, lawmakers need to think more globally. If the tax burden remains high for the businesses that are likely to rent those empty spaces in the shopping centers around the state, then the burden of taxes needs to be eased for them. The targeted tax credits merely shift the burden of taxes from construction to taxpayers who cannot avail themselves of the tax credits. The result is that many of those businesses can’t afford to move into new facilities or in some cases, they go out of business.
If lawmakers truly want to stimulate the economy and support struggling businesses, then they have to get over this idea of singling out only certain people for tax breaks.Lowering the overall tax burden for everyone ensures prosperity for everyone and not only for the select few.
There is already evidence that this targeted tax credit strategy does not work. Just take a look at the high technology tax credits. So these targeted tax credits helped the few who qualify, but they, like the rest of us, must survive in the same community where taxes are high and regulations strangle small business. So is it any surprise that many of these darling high-tech businesses have left town?
With the campaign season underway, voters should ask incumbents, just what have you done to improve my lot as a taxpayer? If the answer is that they have taken care of a few at the expense of many, then taxpayers need to think twice about reelecting those incumbents.

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