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Alternatives To Tax Credits Much More Promising

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By Lowell L. Kalapa

(Released on 2/10/08)

As has been discussed in this space for the past seven or eight years, it appears that lawmakers have become enamored with the idea of using tax credits to stimulate the economy. Perhaps it is the fact that most of our legislators have no idea what it takes to start and run a business in Hawaii or perhaps because they believe that if the credits are not successful, there will be no loss of revenue to the state.

What they refuse to acknowledge is that there is little evidence that the targeted business tax credits actually have produced the kinds of jobs they promised or the new economic activity that outweighs the costs. What is perhaps most insulting to those of us who can’t make the “investments” that can garner those tax credits is that we must continue to pay the heavy burden of taxes because we, as individuals, don’t get any special breaks and those businesses that must struggle with not only the heavy tax burden but the burden of government regulation and all of the labor and insurance laws imposed on businesses just go out of business when they can’t pass that cost on to customers or clients outside the state.

When the state council on revenues made its presentation earlier this session, they were queried as to what council members thought should be done to stimulate the economy given their less than optimistic outlook for the economy in the next few years. Not wanting to side with one approach versus another, they acknowledged the presence of the targeted business tax credits the legislature has enacted in the past few years. And with great diplomacy they avoided criticizing the credits, but took the opportunity to point out that there were other things that the state and, more specifically, the legislature could do.

Of particular note, they pointed to the state’s deteriorating infrastructure from roads to the dilapidated state of Hawaii’s educational facilities. The council members pointed out that with the mortgage crisis looming on the horizon, there was no doubt that the Fed would step in and lower interest rates. This they noted combined with the state’s excellent bond rating would present the state with an excellent opportunity to step in and undertake long-overdue repairs and maintenance of the public infrastructure throughout the state.

Members pointed to the slowing pace of building permits which when combined with the tightening of credit means that there won’t be much demand for the construction of new homes or for that matter, with the tightening of credit, demand for commercial and industrial construction. The window of opportunity for the state to take advantage of this slowdown will last about two to three years.

Not only would the state not be competing with private construction and, therefore, paying more than necessary for those projects, but the state would be able to fill in the gaps providing continuing construction activity for Hawaii’s construction workers.

Well, that just didn’t seem sexy enough for some lawmakers who “harrumphed” by noting that Hawaii is but a speck in the middle of the Pacific. They went on to question what makes Hawaii stand out just because lawmakers improved Hawaii’s roads and schools.

That might have been a legitimate observation if, in fact, Hawaii had the best school system in the nation and its classrooms where supplied with a laptop computer for every student. More importantly, that would have been an appropriate comment to make if, in fact, the roofs on school facilities were in top-notch condition and didn’t leak every time it rained. Or for that matter the paint wasn’t peeling on the classroom doors and that student athletes had a real locker room in which to change into their uniforms. Or as we learned last year, it would be nice if the UH football team had soap with which to shower after a grueling, sweaty practice.

There is no need to ask the motorists what they think about the smooth and wide-open highways with nary a bump in the road. Or how about that bathroom at the park or at the beach? Come on, who would want to invest or start a business in Hawaii when one has to send their kids to a private school to make sure that they have clean and decent classrooms or laboratories?

Why would the prospective entrepreneur want to start a business in Hawaii when he spends half his time at the auto shop because of all those potholes in the road? Oh that’s right, they’ll come because Hawaii can offer those investors tax credits!

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.

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