Well Then, How Do We Stimulate Business?

by Tom Yamachika, Interim President, Tax Foundation of Hawaii

A few weeks ago this column spoke out against tax credits. Not so much because we didn't believe in the worthiness of the causes the credits were trying to support. Far from it. But we were trying to caution folks about the way it's done. No one wants our government to be taken to the cleaners...especially if we all are going to be picking up the tab when the smoke clears.

“OK, Mr. Wise Guy,” you might say. “We have business here, and it’s hurting, so tell me how government can stimulate business short of handing out taxpayer money to the business (which is not allowed under our state constitution).”

All right, then let me talk about a program that has been around for a while. It’s called the Enterprise Zone program.

The objective of the program is to get people employed in parts of the state with high unemployment. First the counties take a look at their lands and they apply to DBEDT for zones. Once the zones are approved, then businesses apply to the program and commit to increase the head count within the zone. The businesses get incentives for a seven-year period, including a credit for income tax due to eligible activity in the zone; a credit for unemployment tax for the same activity; and a general excise tax exemption for the same activity or for construction within the zone. The income and unemployment tax credits taper off over time. Each business sends in a report to DBEDT annually, and that agency verifies that the head counts are indeed rising. If there’s no report or the head count goes south, then there’s no credit for that year.

Here are some of the features of this program that some of the others might lack. The objectives are clearly known and the credit recipients commit to the objectives. The tax relief is substantial at first, but tapers off and stops at a time certain. In that way we do not permanently subsidize an inefficient business. Although the business gets a kick-start, the amount of aid tapers off and weans the business off the credit system so it can compete in the market normally. In the meantime, the business submits relevant data to maintain itself in the program, and that data can be publicly scrutinized to see if the overall objectives are being met. Finally, the business has no incentive to hide the ball. It needs to come up with the information or its credit doesn’t get approved.

Contrast this with the infamous Act 221, the high-tech investment tax credit now expired. This credit awarded people 100% of the amount they invested in a qualified high-tech business over five years. In the beginning, people only needed to claim the credit and there was no precertification process. Legislators asked DOTAX to provide them data about the credit, but DOTAX didn’t have it; their system was not set up to capture the detailed data the legislators wanted. As the State Auditor then stated, the credit law didn’t contain any goals or performance measures to effectively measure the credits. Given that less that 3% of the tax credit claims were audited, some people reportedly took liberties with the facts and claimed some credits to which they weren’t entitled. The credit resulted in $1 billion in lost revenue, and the state could not tell whether the credit was effective.

Want to stimulate business? Fine. But remember the saying by George Santayana: “Those who cannot remember the past are condemned to repeat it.” Stimulus is fine, but it should be temporary, with clear, measurable goals, and it should provide a way for the business to be weaned off it so its global competitiveness does not suffer.

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