Key to Tax Relief Lies in Repeal of Tax “Loopholes”

by Lowell L. Kalapa, Tax Foundation of Hawaii

It is amusing to watch the debate in Washington and then to turn and watch the debate in our legislature over how to raise additional revenue to cover budget shortfalls while providing tax relief to the “great middle class” who just happen to be constituents.

The Washington debate has one side digging their heels in on tax breaks for the “wealthy,” arguing that the rich are capable of paying their fair share citing the fact that in one case the “boss” paid a lower tax rate than his secretary. Here in Hawaii, local lawmakers seem to have no problem handing out tax breaks to the rich albeit in the form of tax credits. This reality was no more apparent than in an editorial board interview with the Speaker of the House of Representatives who noted that the Majority has tax relief on the table for discussion.

However, as the news article noted, that tax relief might have to come at the expense of increasing or expanding tax credits for the film industry or curtailing tax credits for alternate energy. As has been pointed out time and time again in the past, these tax breaks are generally only available to those who can afford to put up the cash up front in order to make the purchase or undertake the particular activity. However, advocates of these tax incentives argue that the credits help to achieve certain desired goals such as stimulating the economy or gaining energy independence from fossil fuels. While these are worthy goals, the question that seems to be lost in the deafening roar of the fanaticism is, who then pays for the public services we have deemed so necessary to the health and safety of our community?

Inasmuch as the constituents of elected officials are not willing to give up services such as education, welfare, or health and safety, the funds to pay for these services have to come from taxpayers who are not so favored with such tax breaks. Of course, those who get those tax breaks believe they are entitled to those tax breaks no matter what the cost. And over the years, various special interest groups have managed to convince lawmakers that these tax credits create a benefit for the community that far outweighs the cost to the state

treasury. These include the construction industry with the hotel and residential renovation and construction tax credits, alternate energy projects, movie and film producers, and high technology innovators.

Of course, they fail to mention that in order to give away these goodies, Hawaii remains in the top ten percent of states with the heaviest per capita tax burden, with one of the most onerous “sales tax” among those states that impose a sales tax albeit at a misleading low rate of 4%. And most recently, Hawaii has the distinct honor of having one of the highest personal income tax rates, surpassed only by California, but then California is always out there ahead of the pack.

The problem is that with such a small state that his highly reliant on capital from outside the state, be it the visitor industry or the federal defense dollar, the heavy tax burden makes it difficult to not only survive for families, but also for the development of new business activity - business activity that creates the jobs that workers need to earn the money to support their families. Ah, but the advocates of those tax incentives argue that is the goal that they are trying to achieve. But then again, one has to ask, at what price?

There is no doubt that lawmakers need to take a close look at how they are using their constituents’ hard- earned tax dollars. And they are using those tax dollars when they hand out tax credits to favored groups as tax credits are just another way of spending tax dollars. And unlike the appropriation process, tax credits are less than transparent as no one knows on what or how those tax dollars are being spent. Instead of undergoing close scrutiny of the appropriation process, once the tax credit is adopted, the taxpayer merely has to meet the parameters of the credit provisions and bingo, the credit can be claimed.

It means that the winning tax credit claimant pays less in state taxes or in some cases actually gets a check for the amount of the credit that exceeds that taxpayer’s liability. Meanwhile the poor taxpayer who can’t claim a tax credit of any shape or form must send in his or her check to pay for the tax credit that someone else gets.

So as lawmakers race to the end of this year’s session, the question they must answer is: are tax credits the best use of the limited tax dollars available to them or are they willing to take pity on their overburdened constituents and actually provide tax relief that many believe is long overdue? It is unbelievable that elected officials have ignored their constituents over the last 20 years in favor of pandering to the very “special interests” they seem to disdain.

- 30 -