It is amusing to watch the debate in Washington and in Hawaii’s Legislature over how to raise additional revenue to cover budget shortfalls, while providing tax relief to the “great middle class,” who happen to be constituents.
The Washington debate has one side digging their heels in on tax breaks for the “wealthy,” arguing the rich are capable of paying their fair share, citing a case where the “boss” paid a lower tax rate than his secretary. In Hawaii, lawmakers seem to have no problem handing out tax breaks to the rich in the form of tax credits. This reality was no more apparent than in an editorial board interview with the speaker of the House of Representatives who noted that the majority has tax relief on the table for discussion.
As the article noted, that tax relief might have to come at the expense of increasing or expanding tax credits for the film industry or curtailing tax credits for alternative energy. As has been pointed out time and time again, these tax breaks are generally only available to those who can afford to put up the cash to make the purchase or undertake the particular activity. However, advocates of these incentives argue that the credits help achieve goals, such as stimulating the economy or gaining energy independence from fossil fuels. While these are worthy goals, the question that seems to be lost in the deafening roar of the fanaticism is: Who then pays for the public services so necessary for the health and safety of our community?
Inasmuch as the constituents of elected officials are not willing to give up services such as education, welfare, or health and safety, the funds to pay for these services have to come from taxpayers who are not so favored with such tax breaks. Those who receive the tax breaks believe they are entitled to them, no matter the cost. Over the years, various special interest groups have managed to convince lawmakers that these tax credits benefit the community in ways that far outweigh the cost to the state treasury. These groups include the construction industry, with hotel and residential renovation and construction tax credits, alternative energy projects, movie and film producers, and high technology innovators.
They fail to mention that in order to give away these goodies, Hawaii remains in the top 10 percent of states with the heaviest per capita tax burden, with one of the most onerous “sales taxes” in the nation — at a misleading low rate of 4 percent. Hawaii also has the distinct honor of having one of the highest personal income tax rates, surpassed only by California.
The problem is that with a small state that is highly reliant on capital from outside the state — the visitor industry and the federal defense dollar — the heavy tax burden makes it difficult for families, but also for the development of new businesses — activity that creates the jobs workers need to earn the money to support their families. The advocates of those tax incentives argue that is the goal they are trying to achieve. But at what price?
There is no doubt that lawmakers need to take a close look at how they are using their constituents’ hard-earned tax dollars. They are using those tax dollars when they hand out tax credits to favored groups. Unlike the appropriation process, tax credits are less than transparent — no one knows on what or how the money is being spent. Instead of undergoing close scrutiny of the appropriation process, once the tax credit is adopted, the taxpayer merely has to meet the parameters of the credit provisions and the credit can be claimed.
It means that the winning tax credit claimant pays less in state taxes, or in some cases actually gets a check for the amount of the credit that exceeds that taxpayer’s liability. Meanwhile, the taxpayer who can’t claim a credit must send in his or her check to pay for the tax credit that someone else gets.
As lawmakers race to the end of this year’s session, the question they must answer is: Are tax credits the best use of the limited tax dollars or are they willing to take pity on the overburdened constituents and provide tax relief that many believe is long overdue? It is unbelievable that elected officials have ignored their constituents over the last 20 years in favor of pandering to the very “special interests” they seem to disdain.
Lowell L. Kalapa is president of the Tax Foundation of Hawaii.
