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Knack of Keeping Hawaii on Bottom Not Lost by Lawmakers

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By Lowell L. Kalapa

A recent study by the national Tax Foundation ranked Hawaii dead last as far as state business tax climate, that is how business friendly each state’s tax system is insofar as attracting and retaining small and large businesses alike.
While some might argue that Hawaii’s done a lot to reduce taxes especially during the last administration when income tax rates were lowered and brackets were widened for individuals and the pyramiding of the general excise tax was mitigated especially for businesses, this national study also focused on how all taxpayers are treated under the law. In this case, the national study took its cue from a recent court decision in Ohio which ruled on the constitutionality of a tax credit that was adopted to attract a giant automaker to locate its manufacturing plant in that state.
While there were a number of objections raised in the court case, the point that the court agreed with is that the tax credit extended to the automobile manufacturer violated the interstate commerce clause because it favored investments in the state as opposed to similar investments made outside the state by the same taxpayer. Thus, it was a case of reverse discrimination.
While that case probably will be appealed all the way to the Supreme Court, it points up the problem with targeted business tax credits. And Hawaii has its share of those tax credits. The targeted business tax credit is probably the reason for Hawaii’s bottom of the barrel ranking as far as business tax climate.
The point that the national Tax Foundation made in releasing the findings of its study is that targeted business tax credits confer a preference on certain taxpayers at the expense of all other taxpayers. Because state or county resources are expended on these targeted business tax credits, the tax credits act as a barrier to any effort to reduce the tax burden for all taxpayers as government will continue to need the resources to pay for government programs and projects.
What is amazing is that the state’s most recent Tax Review Commission also roundly criticized these targeted business tax credits calling on lawmakers and administrators to undertake cost benefit analysis of such proposals before jumping on the band wagon. Even more jaw dropping is that in the face of this criticism from the Tax Review Commission, lawmakers approved new tax credits or provided extensions for three targeted business tax credits.
Probably the most egregious is the $75 million tax credit for the development of an aquarium at the Ko’Olina Resort on the west cost of Oahu. Critics have long pointed out that there are many other resort projects that could have benefited from such a tax credit, why only give to this particular project? Advocates argued on the other side that the development of this project would create jobs for people on the leeward coast who have long suffered from the distance to the job centers on Oahu.
The problem with that argument is that those jobs could also have been created had the state just appropriated the money to build the aquarium. However, it is the tax credits that the developer wanted because they would provide the bait for other investors to participate in the development. This comes at a cost to all other taxpayers who must continue to labor under the heavy burden of taxes for which Hawaii is so well known. Then there is the reform of the tax credit for ethanol facilities for which investors will be able to get nearly all of their investment back because of the design of the credit. While advocates praise the tax credit because it will encourage the production of ethanol to be used as an alternate fuel, one has to ask why the tax credit is necessary if on the other hand the state has mandated that a percentage of all fuel used for highway use be of an ethanol blend? That mandate would almost insure that a supply of ethanol be available to meet the mandate.
The legislation specifies that if the ethanol tax credit is claimed, no other credit may be claimed for the same expenses. However, there is the matter of the high technology investment tax credit that grants a 100% tax credit for up to $2 million invested in a qualified high technology project. Because the investment tax credit, which was extended for another five years this past session, is based on investment and not expenditure, it might be possible that the investment tax credit could be claimed for an investment made in an ethanol facility.
Next week we will take a more in-depth look at why these tax credits create a poor business tax climate.

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