Credit Madness

by Tom Yamachika, President, Tax Foundation Hawaii

In the sports world, we have “March Madness.”  At our Legislature this year, we have “Credit Madness.”  With a surplus on the State balance sheet north of a billion dollars, lawmakers have proposed all kinds of tax credits to advance social policy of one type or another.

Credits were proposed for, among other things, upgrading technology infrastructure; sequestering carbon; upgrading or conversion of cesspools; being a health care preceptor; manufacturing food; providing childcare to employees; being in a creative district; producing organic food; and just being in the state while everyone else is being hammered by a carbon tax. Most of these proposals have fallen by the wayside, but they do illustrate the depth and breadth of proposals for tax credits.

Here at the Tax Foundation of Hawaii, we are not fans of tax credits. There are several reasons why.

First, the tax system is there to bring money into the state, not to give it out.  The good, hardworking folks at the Department of Taxation can’t be expected to have deep subject matter expertise; for example, figuring out the difference between a server, which qualifies as technology infrastructure, and a PC, which doesn’t. That’s why, for several of the proposed credits, the taxpayer wanting to claim one needs to go to another department or agency for certification before putting the claim on the tax return, thereby adding another layer of deadlines and complexity.

Also, in our state, the Department of Taxation can’t even write checks. For tax refunds, for example, it needs to send a request to the Department of Accounting and General Services, which then cuts and mails checks.  It’s logistically tough for the tax department to oversee a program that cuts checks to many people every month, which would be required under a proposal for a child tax credit that is still alive in the Legislature.

Next, when lawmakers spend money it’s nice for them (and us, as the folks footing the bill) to know what they’re buying and how much they’re paying for it. With a tax credit you know neither. Criteria with varying degrees of vagueness are put into the law, and there really is no way to know how much people are going to claim and for what situations that they think match the criteria. (Lawmakers typically rely on the Department of Taxation for a revenue estimate but, let’s face it, they’re guessing too.)  At the end of the year, you see what came in and decide whether to fight any of the questionable claims in court.  In contrast, appropriations to procure things or subsidize expenses allow the relevant agency (hopefully, one with subject matter expertise) to scrutinize questionable claims before the money goes out the door.

This problem is especially acute with some of the credits that award 100% of eligible expenses, at least up to a certain limit. For those expenses, the taxpayer in question pays nothing and the taxpayers pay everything. The taxpayer claiming the credit has no “skin in the game” as to that expense, and may have a hard time taking ownership responsibility for whatever the tax credit bought.

Thankfully, most of the credits that we spoke of earlier are on the cutting room floor. Quite a few remain alive, however, and we shall see what pans out in this year’s legislature.