By Lowell L. Kalapa
They say that no one ever remembers that you were right, but boy, if you were wrong they sure will remind you of it.
Well, the most recent Tax Review Commission report validates everything that has been said about the rash of tax credits lawmakers approved in the past few years targeted as business tax incentives. As a result of these credits, the Commission believes that the state’s tax structure has been severely compromised as there are no reasonable limits set on these credits or mechanisms to provide accountability.
The current Commission notes that since the last Commission met in 1997, the number of tax credits have doubled and have tended to be wide-ranging in application with unlimited amounts. They point out that in some cases, a taxpayer may benefit from a tax credit that is 200% of the amount invested or more. In some cases, some of the legislation allows the allocation of credits among partners without regard to which of the partners may have invested in the particular project that is granted the credit.
The result is that it has become more and more difficult to forecast state tax revenues and the Commission suggests that these credits may be a major cause of present and future revenue shortfalls. The Commission notes that tax incentives may be viewed as an effective way to give money away in order to get the taxpayer to engage in a specific behavior, but the system itself is not particularly equipped to enforce compliance or determine whether an activity meets the technical level required for the incentive.
An example the Commission cites is the fact that under the recently enacted ethanol production credit, it is quite possible that an investor in such a facility could get up to 240% of the amount invested. The Commission also levied its lance at the much touted high technology tax credit. It noted that while the high tech credit was originally patterned after the federal research and development credit with the hope that it would foster technology businesses and investments, as enacted, the current credit is not limited to research and development as defined under the federal law. Instead the credit is for general business activity with generous allowances and no accountability. The Commission concludes that the result is a potential for tremendous revenue losses without any identifiable benefit to the state.
Some specific examples cited by the Commission of the magnitude of the generosity of the high tech credit include a 100% credit for movies made in Hawaii, the possibility of allowing a partner to take the high tech credit even though that partner may not have contributed the capital that qualified the partnership for the credit, and structuring a partnership for a project that qualifies for the $2 million tax credit where 100% of the cost of the project can be recovered. And because the qualifying definition for a high technology activity only requires that more than 50% of the activity be actually high tech, the Commission points out that the taxpayer could conceivably receive 200% of what is actually invested in the high tech activity.
No doubt the boosters of the high technology credit will claim that it is because of Act 221 that Hawaii will attract new high technology businesses. The real question is, at what cost? The taxpayers of Hawaii are being asked to subsidize untold millions of dollars of tax credits without knowing whether or not these businesses will actually create the jobs that supporters of the credit tout.
Will, in fact, many of the businesses that avail themselves of the credit disappear when the credit disappears? Will those businesses take advantage of the credit, create a product or service and then move somewhere else because it is just too expensive to stay and do business in Hawaii?
In their recommendation on this particular credit, the Commission calls for a cost benefit study whenever lawmakers consider such credits. The Commission also recommends that businesses that get the 100% tax credit for the $2 million invested be required to report back to the legislature to justify the investment costs on which the credit is based. Similarly, the allocation of the credit among a group of investors or partners should be based on the economic substance or contribution made that qualified for the credit.
In short, the Commission notes that the present targeted business tax incentives lack accountability and create something of a black hole in state fiscal responsibility. What is scary is that both the administration and the legislature will be back this session to enact more of these “black holes” at the expense of all taxpayers.