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Loss of Control over Revenues – A Tax Credit Weakness

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By Lowell L. Kalapa
(Released on 1/18/09)

As we have learned in recent weeks, the loss of revenues as a result of the high technology tax credits has soared well beyond what was ever imagined. The annual loss for the latest year to date tops more than $100 million.

We have also learned that tax credits, no matter for what purpose, if not designed to offset an undue burden of taxes, actually make the tax system more regressive. That is, they shift the tax burden to the poor, as the beneficiaries of the credits are those persons who have the capital up front to undertake whatever activity that benefits from the credits.

This is an observation made years ago about the solar water heating credits which eventually became the renewable energy credits now on the books. A solar water heating system on average costs about $5,000 and while the industry and advocates point out that up to 65% of the cost will be refunded to the owner, they fail to point out that the owner needs to come up with the $5,000 to purchase and install the device before the credit can be claimed.

As a result, poorer families who can barely afford to make their mortgage payments are unable to come up with the purchase price of the solar device and can’t take advantage of the credit. And yet these very families are probably in most need of relief from the high cost of utility bills.

The same goes for other green initiatives like the credit for hybrid vehicles the federal government offered to spur the switch to more fuel-efficient vehicles. The poor are probably driving an old clunker because they can’t afford to buy a new car let alone a pricey hybrid vehicle. Yet the credit is paid for by all tax dollars collected from both rich and poor.

What is a rising concern is that unlimited tax credits make forecasting tax revenues even more difficult. For lawmakers this means it makes the Budget making process even more of a challenge as they cannot predict how much the Budget will be impacted by taxpayers taking advantage of the credit and, therefore, the dollar amount that will have to be set aside for those credits.

To the extent that tax credits represent an expenditure of public dollars, it would be more appropriate and accountable for lawmakers to provide such incentives by appropriating the funds to an agency that would administer the money and insure that the qualifying expenditures meet the parameters set by lawmakers. This process would insure that lawmakers, as well as the public, know exactly how much is being spent on the program of incentives and who is claiming the incentives.

Lawmakers should also remember that disincentives can cause taxpayers/consumers to react in a desired manner. For example, last summer when oil prices were over $100 a barrel, drivers took more care in driving and residents clamored for energy saving tips as their electric bills ballooned. More people began investigating alternative energy devices and, for those who could afford to, switched to hybrid vehicles. Now that oil prices have fallen so dramatically, will drivers return to their SUV’s and useless trips to the store? Will families let the lights burn in an empty room or the television blare with no one watching it?

Lawmakers may just want to consider energy taxes that will provide a disincentive for the use of fossil fuels. They could restore the general excise tax on the sale of gasoline which is scheduled to expire at the end of June this year. It will force many consumers to weigh their consumption of gasoline and wasted electricity. Nothing hurts more than a pinch in the pocketbook.

At least the public and lawmakers will know who is responsible for the disincentive and the goal that it is trying to achieve in contrast to handing out unbridled tax credits. Further, by setting up a program of incentives for which funds must be appropriated insures that the public can hold lawmakers accountable for the expenditure of those funds and they can weigh that program against all of the other priorities for state tax dollars. With tax credits there is no accountability and there is no control over how much will be spent. It is about time we adhere to the state constitution that says no public dollars may be spent without appropriation by the legislature.

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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