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Kettle Boils Over With Tax Credit Requests

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By Lowell L. Kalapa

Last week we took a look at the mess that the high technology credit has created for Hawaii’s tax system, handing out taxpayer dollars with little or no accountability and little, if any, information about whether or not it is creating the jobs promised. 

Another legacy of the high technology tax credit is the spawning of even more requests for tax credits for this and that. While the high technology tax credit was not the first tax incentive adopted, it is the first of the credits for which no public documentation of the amounts claimed or the results produced were required. The spate of credits that preceded the high technology credit required some kind of reporting like the hotel construction and renovation credits or the residential construction and renovation tax credits which were adopted primarily to encourage the revitalization of the visitor plant or stimulate the construction industry after the tragedy of 9/11. 

Following in the footsteps of the high technology tax credit were credits for the construction of ethanol producing facilities (to supposedly not only produce alternate fuels to “wean” Hawaii off fossil fuels, but also to sustain what is left of the sugar industry in Hawaii) and credits for the production of digital media or film productions. The latter credit was adopted just this past session partly to compete with other parts of the country that were dangling all kinds of tax incentives for movie producers. But the reason given by the administration last session was that the newly adopted tax credit would mean less of a loss than the high technology tax credits which film producers had been able to claim because the medium they use qualified the productions for the high technology credits. 

Just the very idea that tax credits represents a “loss” of tax revenues didn’t seem to bother lawmakers and advocates of the tax credits. Perhaps lawmakers should look at tax credits as a less painful way than appropriating public dollars for a program or, in this case, the subsidy of an economic activity. What seems to elude both lawmakers and advocates is that the “lost” tax revenues have to be made up by someone else since lawmakers are also unwilling to reduce or cut back on spending. If this credit had been an appropriation, would taxpayers approve of spending a billion dollars on subsidizing the high technology industry?

Advocates of tax credits like to claim that there is no “loss” of revenues if people don’t take advantage of them and, if they do, then the tax credits must be accomplishing their intended goal. But what they don’t want to admit is that smart cookies can figure out how to take advantage of these tax breaks without creating the jobs they promised or the economic growth they pledged would happen. It is even more frustrating when they do everything possible to insure that no one can prove them otherwise by being unwilling to divulge any information about the use of the credit.

Advocates who tout the credits as a way to diversify the economy also fail to recognize that these very credits are the reason that the tax burden must remain high on those others who cannot claim the credit. The high burden of taxes is also a major reason why so many of those other taxpayers fail or are forced to move out of state in order to make ends meet. 

And even more requests are coming down the pike for the 2007 session. Among those back begging for credits are the historic preservationists who believe owners of historic structures should be encourage to repair and maintain those historic structures. Others want tax credits for the cost of early childhood care and education. This latter proposal would be in addition to the current tax credit for dependent care which is available under both federal and state law. 

All of these tax incentives are inappropriate uses of the tax credit mechanism. Tax credits, used wisely, should be designed to alleviate an unusual tax burden imposed on those taxpayers who do not have the means to carry that tax burden. For example, more than 30 years ago lawmakers adopted what was known as the general excise tax credit. It was designed to refund those taxpayers at the lower end of the income scale all, or part, of the general excise taxes they paid on necessities such as food, clothing and shelter. The credit was inversely graduated so that those at the very bottom of the income scale got a much larger credit amount than those at the top end where the credit disappeared.

The current set of tax credits that are intended to be incentives to get taxpayers to jump through hoops, basically are being handed out to taxpayers who can more than afford the burden of taxes imposed on them. In that sense, it is a subsidy paid for by all of us as taxpayers for those select few. 

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