Denying Responsibility for Tax Loss Just Typical Legislative M.O.

by Lowell L. Kalapa, Tax Foundation of Hawaii

Criticism aimed at the highly touted high-technology tax credits has now been confirmed by the state’s Auditor in her latest review of the charade that bilked the state treasury out of more than one billion dollars over the decade-long run of the program.

Adopted under the flag of encouraging the diversification of Hawaii’s economic base and promising to provide skilled jobs that would bring the expatriated youth back home, advocates demeaned anyone who would dare question the idea of handing out tax credits for high-technology investments or research in the field of high-technology. The problem with the credit legislation was that it was so poorly drafted that it gave very little guidance in administering the credit and a lot of latitude to those who took advantage of the opportunity to rip the state off.

In fact, when the original bill was drafted, the author of the bill directed that the legislation be “liberally” construed. This is unlike any and every other tax law where the legislation is strictly interpreted, providing a very bright line as to what does or does not qualify for the treatment or application under the legislation. That, if nothing else, should have been a red flag to alert administrators that the floodgates were about to be opened.

Indeed, as the State Auditor points out in her report, the department of taxation struggled trying to administer a poorly drafted piece of legislation that was left open wide to interpretation and begging for guidance. Not only that, but the Auditor goes on to point out that initially there was no way to measure whether or not the tax credits were successful in creating the jobs its advocates promised or whether new economic activity had been created as there were few requirements for those who claimed the credit to report the outcomes of their investments.

What she did not point out is the resistance put up by the advocates of the credit claiming that if such information was required to be reported, people would stop investing and a pall could be cast over the entire

effort to attract investors in high-technology initiatives. Although lawmakers were told that there was already precedent for taxpayers who wanted to claim a certain tax benefit to share information about their operations, including opening their financial records for inspection, lawmakers deferred any such reporting requirements for years until the revenue impact of these credits could not be ignored.

As the State Auditor points out in her report, because there was no limit to the amount of credits that could be claimed and no report to verify the appropriateness of the activity, the sky was the limit. As a result, the Auditor estimates that the impact on the state treasury could approach a billion dollars over the ten-year life of the credit. While the advocates might argue that the credits help to spawn the industry and create jobs that might not otherwise have been realized in Hawaii, one has to ask at whose expense and at what expense?

Had the billion dollars not been squandered so irresponsibly, might Hawaii taxpayers not been asked to pony up more as a result of increases in the income tax or seen the price of goods and services rise as a result of the suspension of the many general excise tax exemptions? At the other end, would teachers have had to endure furlough Fridays or would health and human service organizations have had to make severe cuts as their contracts with the state were curtailed? Could that billion dollars have been a down payment on the state’s unfunded liabilities of the state retirement system and health benefits?

What we do know is that many of those advocates of the tax credit literally took the state and its taxpayers to the cleaners and few, if any, jobs were created. Many of those businesses who used the investors’ funds generated by the credit program, grew their business and then moved them out of state when they realized that they could not survive in Hawaii’s draconian business climate. Others, like insurance companies, imported workers from outside the state to upgrade their information systems and took the credit without creating one new job for Hawaii’s workers.

Meanwhile the lawmakers who were principally responsible for the credit and took the kudos in the heyday when high-technology was the soup du jour, are now just so daintily tip-toeing away from the credit saying, “not me, not me.” Then again, did taxpayers expect lawmakers to take responsibility for this boondoggle? They have never in the past so why expect it now? It is, after all, the legislative M.O.

- 30 -