Questionable Tax Breaks to Help Certain Industries

by Lowell L. Kalapa, Tax Foundation of Hawaii

Over the last decade or so as Hawaii muddled out of the economic doldrums of the 1990’s and was beset with the economic repercussions of the 9/11 tragedy, lawmakers have sought ways to stimulate and encourage economic activity in the 50th State.

Of course, the most attractive way for lawmakers to claim that they did something for the economy is to grant tax “breaks” to certain taxpayers or in the case of that last few years certain industries. After all, these mechanisms could be adopted without lawmakers ever having to appropriate a dime of taxpayer dollars. At least that was the perception as adoption of this legislation did not require money to be appropriated as part of the state budget and because there was no way to accurately quantify how much these tax breaks would cost the state, it took on that aura of getting something for nothing.

As taxpayers learned in hindsight, those tax breaks had everything to do with how much the state had to spend and as the economic times took a nose dive, those lost revenues resulted in lawmakers having to raise additional revenue just to meet the bare necessities of state services. While lawmakers did not resort to increases in the more obvious taxes, such as the general excise tax or an across-the-board increase in the net income tax, they did target certain taxpayers and certain activities for tax increases and also resorted to fee increases.

One would think that lawmakers would have learned a lesson from the spate of tax incentives they adopted during the first decade of this century, the lesson being that those tax incentives sapped the state treasury and forced lawmakers to shift the tax burden to others. But tax incentives abound especially where there is an emotional appeal. For example, the current fad is to subsidize local farmers with all sorts of events and campaigns that emphasize “farm to table.” And there is nothing wrong with encouraging eating locally produced produce and livestock, the problem is utilizing the tax system to provide those subsidies and supports.

For example, during the last session a number of bills were introduced to exempt various agricultural activities from the general excise tax including slaughter houses and processing of poultry and livestock in the state provided that they were also consumed in the state. Generally, exemptions from the general excise tax are granted when the tax would impose an unusual burden or would otherwise cause a taxpayer to do business in an inefficient manner just to circumvent the tax. Exemptions from the general excise tax are also granted if the entity is a nonprofit or if the tax imposed would have a severe economic impact on the state’s economy. The proposed exemption for slaughter houses and poultry processing facilities met none of these criteria.

It should be noted that the general excise tax rate imposed on producing and processing is already levied at the lesser 0.5% rate. Thus, the exemption would have had little financial gain for these taxpayers. The other point to remember is that the lesser rate does provide economists, planners, and industry officials with important information about the industry - the size, economic impact, and growth statistics. All of this information would be lost if the exemption had been adopted.

That said, lawmakers need to take a good look and see that, on one hand they are scrounging for money and attempting to raise new funds with everything from user fees to taxes on specific groups of people and, on the other hand, they are attempting to give away the state treasury with exemptions like the one proposed for slaughter houses and poultry processing facilities. Lawmakers should remember that the tax system is not designed to provide a lure to attract taxpayers into doing or acting in some sort of unusual way, but the tax system exists to raise the funds necessary to operate government.

Instead of attempting to give away the state treasury with such myopic tax breaks, lawmakers need to pay more attention to the overall economic climate of the state which currently suffers from a continuing burden of taxes and regulations.

Lawmakers should remember, giving a tax break to one type of activity comes at a cost to all other taxpayers not so favored unless they are willing to effect a commensurate decrease in state spending. So one has to ask, what is the unusual burden of taxes borne by this particular industry or activity or are these proposals nothing more than pandering to the fad industry of the day? There is literally no justification for proposals such as this one or any other including those for high technology and research.

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