For more than a dozen years now, lawmakers have been touting the tax credit bandwagon, arguing that without these tax incentives, Hawaii’s economy would stagnate and there would be no new jobs for Hawaii’s people.
It comes as no surprise then that lawmakers are once again hard at work trying to stimulate the economy by adopting tax credits for film production, alternative energy devices, agricultural feedstock, research and biofuel production. These tax incentives hold the potential of draining hundreds of millions of dollars from the treasury, the same treasury from which the funds to pay for state programs and services are also drawn.
Since lawmakers have not made concurrent reductions in state services and programs, they will have to look at all other taxpayers to make up the funds that will be handed out in credits and other incentives. It is this point that seems to have been lost on legislators, that these incentive programs are nothing more than another expenditure of taxpayer dollars. Thus, adopting incentives for film production or high technology research is the same as spending on domestic violence programs or classroom teachers. While constituents bemoan the loss of services due to cutbacks in the state budget, they rally behind tax incentives to encourage film production or high technology research and development.
The same can be said on the county level where various groups that enjoy exemptions from the real property tax are protesting suggestions those exemptions be repealed or scaled back. Credit unions vehemently reject the idea that the exemption for credit union property be eliminated, cite the potential reduction of services and interest earnings for their members. They fail to acknowledge that by preserving the exemption, the rate on homeowners has to be maintained or increased. Thus, the home owning members of that credit union are picking up the tab for the exemption.
In the world of tax policy analysts, the narrower the base of a tax, the higher the rate has to be for those taxpayers who remain in the base. That is one of the beauties of the general excise tax. Since the base of the tax is so broad with very few exemptions, the rate can remain relatively low by comparison to retail sales taxes found on the mainland. That is because every transaction is subject to the general excise tax, including services that are not usually taxed under the retail sales tax scheme.
Carving out special preferences for certain taxpayers results in a shift of the tax burden to those who are not afforded the same break. Creating tax incentives or tax credits has the same effect of shifting the burden of paying for government services and programs to taxpayers who do not qualify for the same tax break. Although lawmakers have been reminded of this fact over and over again, they continue to believe such tax incentives are crucial to the diversification of Hawaii’s economy. Never has any lawmaker asked why such incentives are necessary to attract activities nor have they asked who is going to pay for these giveaways.
Lawmakers have not asked who will make up for the loss of revenues when these tax incentives are claimed or who will pay for the education of Hawaii’s youth when those tax revenues are handed out to benefit specific activities. No, lawmakers argue that if those tax incentives are not granted, those folks won’t come to Hawaii, research will be conducted elsewhere and no one will want to build a biofuel production facility to help make Hawaii energy independent. On the other hand, lawmakers bemoan the “brain-drain” as more and more of Hawaii’s youth — Hawaii’s future — decide to leave for more affordable mainland locations.
Does it ever strike lawmakers that Hawaii’s high burden of taxes and its overly regulated environment make Hawaii a place that few can afford? Has it ever crossed a lawmaker’s thoughts that many of the laws they approve each year make Hawaii one of the most expensive places to live? And what have lawmakers done to reduce the cost of living and doing business in Hawaii?
For all of the hoopla around these tax incentives and tax credits, someone needs to remind lawmakers they come as an expense to all of us unlucky taxpayers not blessed with such breaks.
Lowell L. Kalapa is president of the Tax Foundation of Hawaii.