by Lowell L. Kalapa, Tax Foundation of Hawaii

Last week we looked at how political decisions are always clouded by good intentions but short on common sense and cited the tax incentives for alcohol-blended fuels.

Here in Hawaii it seems that taxpayers suffer from a glut of omniscient soothsayers in elected office who believe they know it all and can predict the winner industry of the future. Obviously, these are not people who have been very successful in the business community as many list their occupation as full-time legislators. The result is that few of the people who make our laws have ever had any type of experience running a business and truly don’t understand the challenges entrepreneurs face in establishing a business in Hawaii. Instead, lawmakers grab onto a fad or an idea and suddenly they believe they have found the end of the rainbow, the elixir for Hawaii’s economic future and shower it with all sorts of special preferences.

In recent years those preferences have come in the form of tax credits or tax incentives, be they for the development of high technology, alternate energy devices, water tanks, hotel construction and renovation, residential construction, or ethanol plants. And while it has been consistently pointed out that these tax gimmicks represent a loss of revenues, advocates for the tax credits argue that if they do create a loss of revenues it means that taxpayers are undertaking the behavior that the credits were designed to elicit. Therefore, the credits are succeeding in inducing the desired behavior.

What the advocates seem to ignore is that government spending isn’t necessarily done when these tax incentives are adopted. The demand for those tax revenues doesn’t abate or recede, if nothing else, they seem to grow, as it is more than likely that the economic backdrop is robust, producing all kinds of revenues. That robustness in the economy comes from the fact that other businesses are doing well and, therefore, are paying the taxes due on income. The rub comes when those “other businesses” suffer a downturn, as was recently experienced, and no longer can produce the kinds of revenues to offset the losses incurred as a result of the tax incentives.

On the other hand, elected officials find it difficult to reduce spending as programs and services have become “entitlements” for various constituencies. The upshot is that officials become hard pressed between cutting programs and raising revenues. In recent years elected officials have resorted to finding creative and unique ways of raising additional revenues, first by adopting newly created fees or raising existing fees and then raising very specific taxes and earmarking a portion of the increased proceeds for specific programs.

And, of course, nobody noticed because those new taxes and fees or increased taxes fell on some other guy or because the proceeds were going for such worthy causes like affordable rental housing or the state forestry program. But all of these little funding gimmicks did little to forestall the day of reckoning.

This past session was the second step in coming to terms with how to fill the massive state shortfall. Having enacted tax increases on higher income taxpayers in the prior year and on visitors to the state, lawmakers had nowhere to turn but to find other shadowy ways to increase revenues. That gray area turned out to be the “exemption” of gross income that had formerly been exempt from the state's general excise tax. Though characterized as “special interest” provisions, one former governor noted that these provisions have been on the books for a long time and recognize how the imposition of the tax would exacerbate the cost of living and doing business.

But while these “exemptions” were characterized as being “special interest,” lawmakers refused to acknowledge that they had already given away the store in billions of dollars of tax credits both in the past and for years to come. And there is little to show for all of these “subsidies” that were handed out so freely. Lawmakers did not even keep track nor ask those who benefited from the tax credits to report on whether or not the promises made by supporters of the credits actually materialized.

What is astounding is that even in the face of the state’s looming financial crisis, the tax credit beneficiaries thought they could ask for extensions of these “giveaways.” In fact, one insurance industry honcho paused in disbelief that lawmakers would allow those tax credits to expire.

“Ah sir, we have a huge shortfall and you aren’t helping because the tax credits you claimed means you won’t have to pay any state taxes for the next few years.”

“Thanks for helping us with the deficit!”

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