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Questionable Stimulants Are Addictive

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By Lowell L. Kalapa

When lawmakers convened in early January for the 2003 session of the legislature, it seemed that nothing was more important than stimulating the economy given the looming prospects of war in the Middle East.
And the way to stimulate the state’s economy seemed to be the mechanism that had become all too familiar and easy to do, enact a tax credit. Indeed proposals to adopt a tax credit for this or that ranged from rewarding employers for adding more jobs to their payrolls to deducting amounts owed as student loans if certain professionals set up their businesses in economically depressed areas of the state.
However, a voice that could barely be heard above the fray warned lawmakers that enacting tax incentives for which there was no cost benefit analysis was treading on the thin ice of accountability and of questionable effectiveness in achieving the desired outcomes. This voice came from the most recent report of the constitutionally mandated state Tax Review Commission. The members warned that many of the targeted business tax credits enacted during the past five years since the last Commission convened could have a serious impact on the integrity of the state tax system and an even more pronounced effect on state tax collections.
However, lawmakers chose to ignore the Commission’s warnings through the first half of the legislative session. It was only after the state’s fiscal forecasters, the Council on Revenues, dropped its estimate by two percentage points did lawmakers – and administration officials – wake up and pay attention. Ah, but it was too late. Lawmakers had begun to solidify their positions and commitments.
So when administration officials attempted to present their case that the Act 221 tax credits for high technology be reformed, it was too late. Characterized as a stealth move by representatives of the industry, it was too late to really tell the story of how the credit had been abused.
Given all the problems created by targeted business tax credits, one would have thought that lawmakers and administration officials would have stepped back and set a moratorium on adopting any further tax incentives. But no, tax credits are addictive and even though balancing the state budget was the major challenge of this session, lawmakers continued to adopt targeted business tax credits.
Of the three tax credit measures which survived this session, two are specifically targeted. The hotel tax credit will continue to subsidize the construction industry and hotel facilities. It is a subsidy as the 8% credit is more than a reimbursement of the 4% general excise tax paid on that construction.
While less than the 10% credit extended right after 9/11, it is still more than the 4% general excise tax. The 8% credit will be extended for three years until July 1, 2006 then drop to 4% until repealed in the year 2010.
So the hotel industry will have had this tax break for more than a decade. Perhaps it is because lawmakers see this as “free money” that doesn’t really exist. They are left with the impression that if the credits are not granted then people won’t renovate or undertake new construction.
That is the very argument used by the promoters of the $75 million tax credit for the world-class aquarium to be built at Ko’Olina. The line goes something like this: no credit, no aquarium; no aquarium, no hotels; no hotels, no jobs; no jobs, no job training; no hotels and no jobs; no taxes for government. The problem with that is that the investors have already purchased the property and it is highly unlikely that they are going to let the land sit around without building something on that land. So it is an investment that has gone sour and the taxpayers of Hawaii are now being asked to bail the investors out by building this attraction.
There is nothing wrong with helping to create an attraction that will make that particular area of the island more conducive to visitor industry development and indeed the promoters of Ko’Olina point out that the state has spent millions, if not billions, of dollars dressing up Waikiki and Kakaako. Ah, but that is the point, the state SPENT taxpayer dollars. The state didn’t hand out tax credits. Lawmakers appropriated funds and taxpayers knew what was being bought with state tax dollars. That is not the case with tax credits.
Had the legislature appropriated the funds for the aquarium, at least there would be oversight as to how the money was being spent. With a tax credit, there is no oversight nor any requirement that a specific number of jobs be created or the type of job training that will be provided. In the end, the so called “free money” of tax credits will cost all taxpayers more in higher taxes.

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