By Lowell L. Kalapa
Last week it was noted that in order to move the state’s economy forward, Hawaii must hold the promise of a return on investment for would be investors. This means reducing the cost of doing business in Hawaii from taxes to the cost of regulation.
One of the ideas that was forwarded by the much debated Economic Revitalization Task Force of 1998 that did not take hold was the reduction or elimination of the corporate income tax. Aside from the fact that it would have been a tax break for businesses as opposed to individuals, there were other difficulties associated with the proposal that defeated the proposal not only that year but also in the year following.
No doubt some of the resistance to adopting such a proposal is the fact that it would mean tax relief for businesses as opposed to people – read “voters.” Indeed, it is a reflection of the ignorance of policy makers on what many have known for a long time, things like corporations don’t pay taxes, only people pay taxes. In the case of companies or businesses, taxes paid could have gone for higher wages, reinvestment in capital equipment that would create additional jobs, or in payment of dividends to investors holding stocks or equities in the business.
Thus, the corporate net income tax, which is a tax on the profits made by a company, does nothing more than reduce the available capital to the company that might otherwise help the company expand its operations or pay dividends to investors who in turn believe they are getting a return on their investment and may put more money into the company and increase their investment.
As noted in last week’s column. Hawaii has long been considered a capital short state. Thus, insuring that a company or business has capital to reinvest in its operations is an important tool to insure continued growth in the economy. Thus, the reduction or elimination of the corporate income tax could prove to be an attractive incentive for investing in Hawaii.
While Hawaii would not be unique in not taxing corporate profits, it would be one more reason to add to the list of assets Hawaii has to offer such as climate, natural surroundings, and mid-Pacific location.
There are five states which currently do not impose a corporate income tax. Those states include Nevada, South Dakota, Texas, Washington, and Wyoming.
Of all of the proposals to cut or eliminate taxes, this proposal would have one of the smallest impacts if the tax was eliminated altogether. The net corporate income tax accounts for somewhere between $40 and $60 million annually. This is about 1% to 2% of total general fund revenues each year.
Such an across-the-board reduction or elimination of the corporate income tax would benefit all businesses and not just those who undertake a specific activity. It would reward companies for being profitable and hopefully encourage companies to take those hard-earned profits and plough them back into the business and create more jobs.
Some might argue that companies should pay taxes on the profits they earn. And while it might make sense that everybody should pay their fair share, be they individuals or companies, one has to remember that the income a business makes is already subject to tax a number of times. Here in Hawaii that starts with the general excise tax on every penny a company takes in. The profits of the company are then subject to the net corporate income tax at both the federal and state level. Then what is left over and paid to shareholders is subject to the personal income tax of the individual shareholder. Let’s not forget the fact that the same income taken in by the company and paid to employees is subject to the personal income tax.
So what is the other reason the proposal to reduce or eliminate the net corporate income tax failed to get approval? It seems that the proposal recommended reducing the tax for all entities – in this case this meant reducing the tax rate on financial institutions that pay the bank franchise tax in lieu of the corporate net income tax. Because the bank franchise tax is also paid in lieu of the general excise tax, the tax rate cannot be reduced on a point for point basis as part of the bank franchise tax is paid in lieu of the 4% general excise tax.
If this distinction was removed between the two taxes, then reduction or elimination of the net corporate income tax might be acceptable to policy makers. In the meantime, serious consideration should be given to the idea of providing across-the-board tax relief as a means of making Hawaii a more attractive place to invest.