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Let Up On The Economic Tinkering

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By Lowell L. Kalapa
(Released on 2/20/11)

Somehow lawmakers think that if they tinker long enough with various components of the economy that somehow they can jump start it.

Despite the fact that the state budget continues to grow and lawmakers are scrounging for every last penny to balance the state general fund budget, members of the legislature continue to introduce legislation to provide tax incentives that they hope will stimulate certain parts of the economy. As if in deja vu, some lawmakers have reintroduced the idea of providing a tax credit for residential renovation and construction as a way to get construction workers back on the job. The first coming of this idea occurred right after 9/11 when construction came to a screeching halt as the world stood still in the aftermath of that tragedy.

Although some may claim that the previous tax credit incentive “jump started” construction activity especially in the wake of 9/11, looking back there is general agreement that the tax credit created artificial dislocations in the economy, creating demand that exceeded the industry’s ability to respond, sending labor and material costs beyond reasonable limits. The result is that in the years following the termination of the credit, the cost of construction exceeded reasonable levels.

As a result, when the credit markets froze following the debacle of the subprime lending, the cost of construction was so high that there was insufficient latitude in the availability of credit to meet and absorb the demand and higher costs of construction. Thus, construction activity came to a screeching halt again as there was insufficient credit capacity to keep projects going. Instead of the spike in construction activity that the tax credit created, recovery should have been stimulated with public works projects that allowed government to take advantage of a skilled workforce available at reasonable rates. It would have allowed recovery with moderation. Instead, as many homeowners rushed to take advantage of the last tax credit boom, they found that workers became scarce, and what labor was available came at inflated costs. But the result of this boom time was a lasting hangover of inflated labor and material costs that put the cost of construction out of the reach of many prospective projects while making it more difficult for contractors to bid on projects and bring the cost in at an acceptable level.

The long and short of the economic lesson is that artificially stimulating the construction market after 9/11 set the construction industry on a path of doom when the national recession hit Hawaii. While Hawaii did not experience the decline in the real estate market that many mainland states experienced, the freezing of the credit markets exacerbated an already overpriced construction industry. Now lawmakers are about to adopt another tax credit for residential renovation and construction. What impact that will have on the construction industry somewhere down the road cannot be good given the track record of the last tax credit for residential renovations.

That specific credit aside, readers should be flabbergasted that on one hand lawmakers are being asked to consider tax increases with everything from taxing pensions to taxing sodas and increasing the tax on alcoholic beverages and at the same time they are considering a slew of tax credits that will sap the very funds that the tax increases are supposed to raise. One of the more spectacular tax credit proposals will be to juice up the film production tax credit and provide tax incentives for building a film studio in Hawaii. Proponents argue that the tax credit proposals aren’t really a loss of revenues if they fail to attract these activities to locate in Hawaii, but if someone claims the credit it means that there is economic activity.

What the backers of this credit fail to understand is that there is no discretionary money to be had and that, in fact, the residents of Hawaii are being asked to shell out even more in taxes so that a handful of beneficiaries can laugh all the way to the bank. And in the end, if the investment is made and the tax credits are claimed, but the studios close down because of Hawaii’s high cost of living and doing business, guess who will be left holding the bag?

No, Hawaii taxpayers have gone down this road before. While many states are competing for film production companies, lawmakers should understand that every objective review of this tax policy labeled such tax credits as “wasteful, ineffective, and an unfair instrument of economic development.”

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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