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Doing the Business Climate Good Without Tax Credits

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By Lowell L. Kalapa

As lawmakers head into the final stretch of this legislative session, all eyes will be turned on the budget as each lawmaker strives to save his or her special project or appropriation.
Because it seems that state tax revenues may not materialize as forecast by the State Council on Revenues, lawmakers may be looking at huge shortfalls in resources to fund the state budget. This picture is complicated by the substantial awards in recently settled public worker contracts.
Preparing for the worst, lawmakers have been eyeing a host of special funds which they have deemed to have excess amounts and want to use these “excess” funds to balance the state budget. Unfortunately, many of these funds operate on balances generated in the previous year in their respective special funds. Where advocates for these various special funds believed that the special fund would hold them immune from having to annually prostrate themselves before the legislature, the special funds have now become targets for raids to help balance the general fund budget.
What is ironic is that the general fund would probably not be short of cash if lawmakers had resisted the temptation to find quick fixes to the state’s economic woes. Beginning in the mid 1990’s when Hawaii was going through the longest economic slump in its history, lawmakers turned to tax credits as a way to “fix” the economy. Because the tax cuts enacted by the 1998 legislature would be phased-in over four years, lawmakers believed that tax credits would provide instantaneous solutions to the economic doldrums.
Besides in the eye of the lawmakers, tax credits were a cheap way to show that they were doing something to fix the economy. Even today there are some lawmakers, as well as advocates, who see tax credit dollars as somehow being different from general fund dollars. What they don’t realize is that every tax credit dollar claimed means there is one less dollar that will go into the general fund.
And that is the problem that lawmakers face. While they squirm and toss looking for ways to shore up the general fund so that they can pay for important state programs and services like education and welfare assistance, they are spending those very tax dollars they need out the back door with tax credits. What is unfortunate is that at the time they adopt those tax credits, they usually have no idea what it will cost the general fund in lost revenues. Lawmakers are also not certain the tax credit will indeed achieve its intended goals. In fact, this uncertainty is at the very heart of the whole debate over the high technology incentive tax credits otherwise known as Act 221 tax credits.
What is sad is that while lawmakers are giddy over the idea of stimulating high technology or some other economic sector like film production and sound recordings, they don’t have the money to pay for the very basic services that are critical to making Hawaii an attractive place to do business. For example, over the past eight years the state highway fund has been raided for as much as $144 million to shore up the state general fund. In the meantime, the condition of Hawaii’s state highways has continued to decline with more potholes and bumpy roads per mile than the state has seen in its short history. Then there are the public schools and the university wanting for maintenance and repair of facilities not to mention paying educators a better salary. Businesses looking to relocate or invest in a new venture in Hawaii look at the condition of the state’s public schools and think twice. After all, if their employees figure their kids will get a better education in a private school, employers will be asked to pay more in order to accommodate this added expense.
And when tax credits accrue to the favored few at which the incentives are targeted, that means everybody else has to pick up the tab just to keep state government running. Favoring only a few means that taxes on every one else will have to remain at a high level that has earned Hawaii the 4th highest rank in the tax burden race among the fifty states. And while some might think the business community would be decrying the high burden of taxes on their businesses and employees, many business organizations are on the bandwagon supporting many of these tax incentives and, in many cases, asking for even more specialized tax breaks.
It is about time that lawmakers and the public alike recognize that these targeted business tax credits steal from everyone and contribute to an overall poor business climate in Hawaii.

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