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Kettle Empty As A Result Of Tax Expenditures

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By Lowell L. Kalapa
(Released on 1/2/11)

Expecting to enjoy a delightful holiday dinner, an Act 221 advocate decided to berate, nay assault, about what the state would do now that the tax credits for high technology research and development were about to expire.

This spate of bad manners was ignored for not wanting to spoil others’ holiday cheer, but certainly deserves a response, if not at the time then for the sake of posterity. One has to remember that tax credits and tax incentives that are adopted for reasons other than to relieve an excessive tax burden are nothing more than an expenditure of taxpayer dollars. In this case certain taxpayers who can claim those tax incentives forego paying their fair share of the tax burden while those of us who don’t fit the bill have to continue paying our share and in recent years have been asked to pay even more as tax collections declined.

So for those taxpayers who saw their tax bills rise, be it the additional two percentage points on the TAT or for individuals making more than $150,000 ($300,000 for couples) a year, they can thank the advocates of Act 221 and other targeted business tax incentives for increasing their tax bills. Act 221 alone is estimated to cost the state treasury more than a billion dollars before all is said and done. And yet, advocates want to come back this year and seek its renewal.

The overly generous and unprecedented tax credits lacked accountability, provided no proof that the promises made, such as an increase in the number of jobs in the high tech sector or that the jobs created paid high wages and salaries, were kept. And when lawmakers asked for information, they were told that doing so would send chills through the high tech sector and drive investors away from providing the much needed capital investment.

When advocates did finally agree to provide information, the information was well hidden in surreptitious percentages to impress lawmakers. But as we all learned in the fifth grade, percentages can be deceiving – like the number of jobs increased 100%! Well, yes, last year we had one employee and this year we have two – that’s a 100% increase!

Tax credits have become the bane of good tax policy, as lawmakers believe they are the magic pills to solve any ill. There have been credits for home remodeling, hotel renovations, medical services, nursing facilities, alternate energy devices, contributions to individual development accounts, and drought mitigation. Tax credits for motion picture and television productions as well as the building of an ethanol plant remain on the books along with the credits for alternate energy devices. In addition to the lack of accountability, tax credit funds are gone before one realizes how much money they are costing taxpayers.

Although advocates declare that if the tax credit isn’t enough of an incentive then there will be little or no loss in revenues and if there is a loss in revenues, that means it has been successful. The point that seems to be lost is that if, indeed, it is successful in attracting taxpayers to undertake a specific activity, then what is the appropriate price tag? Given that none of the targeted business tax credits have had aggregate ceilings, the sky was literally the limit. The down side to that was that we taxpayers got stuck picking up the tab with higher taxes as the cost of government didn’t shrink to accommodate this back door expenditure.

So this is in response to the question of what can we do to stimulate the state’s economy in lieu of adopting such egregious tax credits. Lawmakers should do everything they can to make it easier to do business in the state by reducing the burden of taxes and regulations, streamlining the permitting and zoning processes, automate government operations, and begin to look at downsizing the state’s workforce. If it is not clear already, the size of government in Hawaii has gone well beyond the means of the economy to support the size of the workforce. Public employee union leaders need to recognize that increasing the numbers on the public payroll merely dilutes government’s ability to provide the kind of generous salaries and benefits public employees have enjoyed in recent years. It is also obvious that any increase in tax burden will merely damage the long-term economic well-being of the state and when that happens all workers will be in jeopardy. One only has to look to California to see the consequences.

No, tax incentives and tax credits will not benefit the overall economy like an improvement in the business climate. Period.

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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