While lawmakers may have the best intentions, they often refuse to listen to the advice of those who have been there and done that.
This became more evident during the latest crystal ball gazing by the state’s Council of Revenues’ wizards. Although the seven-member roundtable believes the state’s economy is improving, the hopes of observers were dashed when the tax department announced that losses from alternative energy tax credits are going to be $70 million more than the department had first estimated and that the much anticipated revenues from the suspension of more than a dozen general excise tax exemptions would produce only a fraction of original estimates.
Between the two estimates of revenue impact, the tax department advised the members of the Council on Revenues that their forecast for the coming fiscal year had to be adjusted downward by nearly $110 million. This meant the council had to drop its forecast growth for general fund revenues from 7.5 to 5.3 percent for the fiscal year beginning July 1. Given that the supplemental budget approved by the most recent session of the Legislature was based on the 7.5 percent growth rate, there is no doubt the governor will have to pare back the release of dollars appropriated for the coming fiscal year.
While there will be lots of finger pointing, there is enough blame to pass around to all the concerned parties. While some issues can find their genesis in legislative actions, the Department of taxation has to share some of the blame. In the case of the alternative energy tax credit, it is quite obvious that lawmakers did not do their homework to learn more about developing alternative energy technology. Nor does it seem that lawmakers understand the limits placed on the amounts of the credits and how they reconcile with the conventional electric company to achieve “net zero” metering.
At the same time, the Department of Taxation interpretation of the tax credit also created a huge hole in the revenue picture as its definition of “system” allowed taxpayers to claim more than one credit per installation. When the department pointed out that the language of the law needed to be tightened up, the legislature left the corrected legislation on the cutting room floor. Thus, the drain on state revenues will continue for another year or at least until the department can draft a new interpretation of the current law that will limit the definition of what constitutes a system.
In the case of the suspended general excise tax exemptions, lawmakers were told that many of the exemptions had been adopted because without them the structure of the general excise tax would exacerbate the imposition of the tax on goods and services causing the cost of living to increase substantially and put Hawaii at a competitive disadvantage in the global marketplace. They were also warned they could not change the rules of the game in midstream since a number of businesses had existing contracts that recognized the exemptions as part of current and future transactions. As a result, the Legislature recognized these existing contracts and grandfathered the exemption for these taxpayers. What they did not realize is that taxpayers who were watching this happen rewrote their existing contracts before the effective date of the legislation. As a result, those who might have been caught in the suspension of the exemptions were able to avoid being taxed.
As the accountant on the Council of Revenues pointed out, skilled accountants probably were able to devise ways to circumvent the suspended exemptions. But lawmakers relied on numbers generated by the Department of Taxation which obviously had no clue that ways could be devised to get around the suspended exemptions. Department analysts pegged the potential revenue to be gained by suspending the general excise tax exemptions at more than $340 million. But the Council on Revenues was suspicious of the lofty revenue estimates and, in September, they cut the anticipated revenue figure in half.
After re-evaluating the impact of the suspended exemptions, the department believes the suspended exemptions will generate just a wee bit more than $50 million. The result is that there will be much less to fund state programs and services in the coming year.
If there is a lesson to be learned here, it is don’t rush in where wise men fear to tread.
Lowell L. Kalapa is president of the Tax Foundation of Hawaii.
