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Yen for Gimmicks Contorts Tax System

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By Lowell L. Kalapa

For the past two weeks we have had a laugh at how some “good” ideas more than two decades ago have wreaked havoc on the financial canvas of California. Today we want to take a look at some of the gimmicks which have had similar, but perhaps milder, effects on Hawaii’s financial picture.
Well intended as they may have been, lawmakers at the dawn of statehood decided that they wanted to attract rich elderly persons to the Islands who would bring their wealth with them and spend it here. So they passed a tax incentive to attract those over 65. The proposal provided for an exemption from the state=s income tax all income received by these persons from sources outside the state.
This tax incentive was given the nickname “the Kaiser Amendment” because Henry Kaiser, who had moved here to develop the Hawaiian Village, Hawaii Kai, and owned the local ABC affiliate, fit the exemption to a tee. While Henry Kaiser invested millions of dollars in Hawaii and probably realized millions of dollars of return on that investment, all of his other income from interests he had outside the state was not subject to taxation by the state of Hawaii because of this tax incentive.
However, there is no doubt that Henry Kaiser had the ability to pay state income taxes on that other income, but because lawmakers at the time believed attracting rich elderly people to the state would help the economic base, they adopted this tax incentive. Little did lawmakers recognize the inequity of taxing long time Hawaii residents both below age 65 and over age 65 on all of their income regardless of its source.
It took nearly 20 years before lawmakers realized that they were penalizing their constituents for the benefit of those who never contributed to the state’s infrastructure and services during their careers but upon moving to Hawaii after their retirement could benefit from all of those facilities and services without having to pay income taxes to the state.
Another example of a failed gimmick is the proposal put out by the administration over a decade ago in response to the cry for affordable housing. In the hope to encourage developers to build tons of affordable housing the Waihee administration proposed exempting all construction of affordable housing from the 4% general excise tax on the first 10,000 affordable housing units built by December 31, 1994. And developers took the bait and rushed to build as many affordable housing units as they could before the deadline set by the legislation.
The only problem was that as developers rushed to build all of these affordable housing units, the real estate market and the economy started to go into a tailspin. As a result, developers were stuck holding the inventory of affordable housing for several years while the demand for those units ebbed. Again, another example of how well intended gimmicks introduced through public policy end up creating more problems than solutions.
More recently other so-called tax incentives, or gimmicks if you will, have been adopted as public policy to supposedly encourage certain types of actions. Instead, those tax incentives have either been a waste of money or nothing more than a public subsidy of a private project. From tax credits to encourage construction at a time when interest rates are at a historic low fueling a demand for housing and other types of construction to tax credits which basically discount the cost of research by 20%, these gimmicks are nothing more than a waste of precious tax resources.
So what other kind of gimmicks are out there? In the past few years lawmakers have floated all sorts of tax credit proposals hoping that these gimmicks will jump start the economy. And it looks like lawmakers will again throw more tax incentive gimmicks on the fire.
It is amusing to speculate what sort of new idea lawmakers will float as a trial balloon. Will they go back to something like the Kaiser Amendment and exempt rich investors who move to Hawaii or will they extend some sort of moratorium for high technology companies? Will the argument again be that Hawaii really didn’t lose any money by adopting these gimmicks, because the income would not be there had these people or companies located to Hawaii?
Unfortunately the point missed is that once these gimmicks or incentives expire, then those most favored become like any other taxpayer or business struggling to survive in Hawaii. Instead of quick fix gimmicks, administration officials as well as lawmakers, need to fix what makes it so difficult and expensive to do business in Hawaii.

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