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Restore Integrity to Tax System

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By Lowell L. Kalapa

Over the past few years, lawmakers have resorted to various tax incentives to kick-start the economy largely because they had no clue as to what was needed to fix the state’s economy. This syndrome then carried over to other attempts to solve problems.

As a result, the income tax system has become littered with all kinds of tax credits and tax exemptions or exclusions to take care of this or that problem. It wouldn’t be such a problem if, in fact as promoters of these tax incentives passionately proclaim, they created more income and therefore generated more tax dollars. However, that claim has yet to be proven as even the last Tax Review Commission noted, no cost benefit analysis has been done to validate these claims.

What is unfortunate is that we, the average taxpaying joes who can’t qualify for any of these tax incentive goodies, end up paying for the windfall of the chosen few. You mean we pay, you may ask? Of course, if the tax incentives result in little or no revenues from beneficiaries of these tax incentives but government still needs money to provide services, then government must continue to take it out of us not-so-favored taxpayers. It would be a different thing if government downsized and reduced expenditures and therefore the demand for tax revenues, but that has not been the case.

As a result, the rest of us taxpayers have to continue to pay the heavy burden of taxes all the while struggling to put food on the table and keep the doors of our businesses open. Just who are the beneficiaries of these tax incentives?

The following is a list of beneficiaries who have received tax incentives in recent years: 

  • Exemption from the general excise tax for the first 10,000 affordable housing units built by 12/31/94
  • Refundable tax credit of 4% of costs incurred by movie producers and credit of 7.25% of the cost of hotel rentals by such taxpayers
  • Tax credit for hotel renovations and construction of qualified hotel facilities
  • Tax credits for investments in an ethanol production facility
  • Tax credits equal to 10% of the value of in-kind services made by architects, surveyors, pest control  operators and engineers for the repair or maintenance of public schools
  • Tax credits for high technology investments, infrastructure and research
  • Tax credits for the construction of new water storage facilities
  • Tax credits for residential remodeling and construction Tax credits up to $75 million for the construction of a world-class aquarium at Ko’olina
  • Tax credits for eligible renewable technologies – solar, wind and photovoltaic

The majority of these tax incentives have been approved in the last seven years as lawmakers began to view these tax credits as a solution to problems they felt needed to be “solved.” Unfortunately, these tax incentives or tax breaks amount to nothing more than appropriations of state funds out the back door. With the exception of the $75 million tax credit for Ko’Olina, there is no limit on how much can be claimed by eligible taxpayers. As a result, no matter how much lawmakers prognosticated at the time these breaks were adopted, they have no clue as to how much the final tab will be.

The result is that as taxpayers figured out how they could take advantage of credits like those for high-technology investments and research, the losses grew beyond what lawmakers had originally envisioned. Even the body which is charged with forecasting what tax revenues will look like a year or several years down the road found their task perplexing because these tax breaks are so unpredictable.

The fallout was the back and forth passing of the blame of which estimate of revenue was correct and how accurate the number happened to be. But the long and short of it is that lawmakers themselves, and perhaps the governors who signed some of this legislation into law, are to blame for basically damaging the integrity of the state tax structure.

Approval of these tax incentives basically discriminated again the backbone of the revenue system, the “joe average” taxpayer who continues to bear the brunt of the tax burden in Hawaii. These tax breaks – because they sap the treasury of tax dollars – make it all the more difficult for families to survive in Hawaii and for businesses to stay in business in Hawaii.

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