By Lowell L. Kalapa
As many readers have read or heard, Hawaii’s tax code is now riddled with all sorts of tax incentives and tax breaks for various and sundry sorts of activities.
From the construction and renovation of hotels to building aquariums on the Ewa plain to high technology and to the construction of ethanol producing facilities, there seems to be a tax break here and there throughout the state tax code. And while lawmakers may believe that these tax breaks will do something to stimulate the economy or grow new jobs, they come not only at the expense of other taxpayers who can’t claim the break but they also complicate the job of forecasting how much revenue the state will take in during the coming years.
For example, one economist recently opined that he found it puzzling that state collections of the 4% general excise tax were mushrooming while state corporate income taxes were shrinking. In the past, one would think that larger general excise tax collections on sales would mean that businesses are making money and therefore the tax on the profits of those sales would produce a parallel trend in net income taxes on businesses.
So while sales are up along with the 4% general excise tax collected on each transaction, the net income tax liability of these businesses may actually be offset with many of the tax incentives and tax credits adopted by the legislature in recent years. But didn’t we just say that these tax incentives favored only those who could perform the required activity such as construction of hotels or the investment in a high technology business? And that would be true but for the fact that many of these credits can be sold to other taxpayers who have large net income tax liabilities. As a result, while the credit may not be of benefit to the favored taxpayer, that taxpayer can then turn around and sell the credits claimed to another taxpayer who has a state income tax liability.
And up until now, it has been largely the state net income tax that has been affected as these tax incentives have taken the form of credits that are applied to the net income tax. However, with the implementation of the tax credit requiring that an aquarium be built at Ko’Olina on the western plains of Oahu, the $75 million in credits that can be claimed under that law will allow taxpayers to apply the credits to nearly all of the taxes levied by the state. Thus, if a claimant of the credit has no income tax liability, they might want to apply the credit against their transient accommodations tax liability if the claimant operated a hotel or if the taxpayer was a storeowner in the resort, against their general excise tax liability.
Since forecasters won’t be able to predict against which tax the taxpayer will apply the credit, it will become even more difficult to determine what each tax will produce. In the case of the general excise tax and the transient accommodations tax which are both imposed on the rental of transient accommodations, disparities will occur as taxpayers may apply their credit against one or the other tax but perhaps not against both in the same measure.
And it seems like lawmakers again will be tempted to enact even more and bigger tax credits to “encourage” industries like television and film production and perhaps even extend the hotel renovation and construction tax credits in the name of keeping Hawaii’s visitor facilities “up-to-date” and competitive with other visitor destinations. Good as it may sound like these tax incentives will help to improve the economy, these very incentives will continue to make it difficult to forecast the revenue picture for the state. Because many of these incentives have very little to do with the economic indicators for the state as the activity being encouraged will usually take a number of years after the credit is claimed to produce any significant impact, revenues will not track those economic indicators.
Trying to figure out how those tax credits will affect future revenues will be just as impossible as trying to figure out which taxpayer will make the necessary investment or purchase eligible to claim the credits. That is the problem with tax incentives, neither lawmakers nor revenue forecasters can predict what the reaction will be to the credits and just how much in credits will be claimed.
For the taxpayer, the perpetuation of these credits merely means that the day of seeing his or her tax burden reduced becomes even more distant as government continues to need every revenue dollar it can get while shelling tax credits out the back door.