Although Tax Credits Discussed, None Approved

by Lowell L. Kalapa, Tax Foundation of Hawaii

Although there were numerous proposals to either adopt new tax incentives or tax credits during the 2012 legislative session, none passed. Similarly, there were a number of attempts to either sweeten or extend existing tax credits. Those proposals also failed to see the light of day.

The tax credit that garnered the most attention this past session was the proposal to enhance and extend the film tax credits after the splash of the movie “The Descendants” and the possibility that it might win awards in a number of competitions including the “Oscars.” Although the film tax credit has been scaled back from the original digital media and the high-technology tax credit with a cap of $8 million per production, it is, nonetheless, a hefty hit against state resources. And perhaps this was one of the reasons why state lawmakers were reluctant, in the end, to pass more generous provisions.

Although there are still advocates of the credit including those who will be employed by these productions and the accountants and lawyers who cut the deals, the general taxpaying public is beginning to realize that these give aways must be paid for as state lawmakers do not compensate for the loss of tax revenues by reducing other programs. For a while there, lawmakers saw these tax credits as a way to stimulate the economy, create jobs and diversify the economic base. They all figured that if the tax credits were claimed, it was an indication that the incentive worked and accomplished the intended goals.

What lawmakers did not realize is that the tax credits represented tax collections foregone, that is, tax moneys that could be used to pay for programs and services provided by state government. In other words, tax credits are nothing more than an expenditure of state tax dollars on the particular industry or activity that is the target of the tax incentive. What was even more inane is that no information was collected on the economic impact of the activity. Only recently was information collected when critics started raising questions as to the number of jobs created by the targeted activities, the kind of payroll and expenditures made by the favored industry, and the long-term impact of those activities.

While investors and other claimants of the credits argued that sharing such information would send a chill over the investment community, lawmakers finally realized that without proof that the tax incentives did indeed create new industries and jobs, support for the continuance of those tax incentives soon melted.

More important is that the combination of the recession and historic budget shortfalls helped to drive home the fact that the barrel was not bottomless. Only when taxpayers - both businesses and families - struggled to make ends meet did it seem that lawmakers realized that those tax incentives were competing for the very resources that they needed to fund programs and services that state government is asked to provide.

When reductions in the education and welfare budgets had to be made, lawmakers found that they could not make similar reductions in the generous tax incentives. Those who benefited from the credits pointed out that the legislature had adopted those incentives and taxpayers had undertaken the desired activity based on those incentive provisions. In other words, legislators could not change the rules of the game. Thus, while health benefits for the poor and after-school child care programs were slashed, investors in high-technology ventures and producers of film productions continued to feed at the trough. And because many of these credits are given out in increments over a period of time or are nonrefundable and must be carried forward until the amount of the credit is used up, the fiscal hangover will be with lawmakers for years to come. As a result, it will be a long time before the state’s fiscal picture will return to normal, even if the economy recovers.

So will lawmakers ever consider providing such tax incentives in the future? Sure, they are always good for a snazzy bling they can trot in front of their constituents, but if the legislative money managers have anything to say about adopting such wild schemes, it is doubtful that lawmakers will be able to go down that path in the near future. That’s not to say that some eager lawmakers in the future won=t be bedazzled by the prospect of providing some sort of tax incentive for the next sexy thing, but for those lawmakers who have struggled over the past four years, they will remember that they had to raise taxes and cut vital programs just so they could make the books balance.

What they did learn is that those tax credits have a way of getting out of hand and there is little they can do to close the barn door.

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