Helping To Drain The State Treasury With Tax Credits

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Photo: Emily Metcalf

By Lowell L. Kalapa – As the year end nears, accountants are reminding their clients to avoid paying more than they have to by either moving income into the next tax year or making payments that will qualify as a deduction that will then, in turn, reduce their client’s taxable income.

However, this year the tax scramble is not so much for shifting income and deductions from one tax year to the next as much as it is about getting one’s solar energy device installed and operating before the end of the year. This is because for state purposes the rules will change that will basically tighten the cap on how much of a credit a homeowner may claim.

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In reading the law, there is a ceiling limit on how much may be claimed by a homeowner. That amount is $5,000 per system. The law does not specify what a system is and, therefore, the definition or interpretation was left to rule making. The problem is that the drafters of the legislation assumed that one residence would have one “system.” Thus, when the department of taxation finally issued clarifying rules after the new credit was adopted, it defined a system as having a single inverter, the mechanism that converts the direct current produced by the sun’s rays into alternating current which is what a household uses.

As a result, a single family residence could have a number of inverters which meant that one house could have a number of “systems,” where each “system’s” tax credit ceiling is the statutory $5,000. Thus, where lawmakers and perhaps department officials envisioned one system per single family residence and therefore a cap of $5,000 of tax credit, as defined, a single-family residence could have more than one “system” and each of those systems would qualify for the $5,000.

Now the department has come forward with revised the rules that define a system based on the amount of power that can be produced. Given that “system” was never defined in the state law and that the interpretation of the term “system” was guidance given by the department in its original analysis of the term, rewriting the interpretation seems entirely within the department’s jurisdiction. While advocates of the credit wish to remain at the status quo arguing that it is up to the legislature to change the definition of the system, they must remember that it was the legislature that left the vague term of “system” as part of the law and provided no further guidance. Thus, while advocates may believe that it is up to the legislature to make a change, until that time it is in the department’s hands to interpret what a “system” is.

The department’s change is in reaction to multiple installation of systems on one single family residence, allowing a taxpayer to collect more than the intended cap of $5,000 per residence. The outfall is that the state will lose millions of dollars more than lawmakers had anticipated when they adopted the most recent version of the credit. That loss of revenue will have a direct impact on the amount of money the administration and the legislature will be able to spend during the next fiscal biennium. This shortfall of resources will prompt lawmakers to either raise taxes or cut spending, both highly unpopular choices.

While tax credits of themselves aren’t bad, misuse and misunderstanding of how they can alleviate an extraordinary tax burden has led the department to the point that it needs to tighten the draw strings on the credit. The fact of the matter is that the solar credit, as drafted, is unbridled in that there is no control over how many taxpayers will claim the credit and how much will be claimed.

As a result, soaring losses well beyond what was anticipated means that the tax burden will have to be shifted to other taxpayers who could not avail themselves of the credit. And that tax burden can take the form of increased taxes or reduced spending on other government programs and services. Inasmuch as lawmakers dislike telling their constituents that they can’t have this or that program and swear to support education, the only viable alternative is to raise more revenues either directly with a tax increase or indirectly with user fees and charges. The result is the same, an additional burden will be imposed on the community and the economy at large.

To look at it another way, aren’t you glad you helped to pay for your neighbor’s photovoltaic system while you keep on paying higher electric bills and higher taxes?

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3 COMMENTS

  1. […] Helping To Drain The State Treasury With Tax Credits However, this year the tax scramble is not so much for shifting income and deductions from one tax year to the next as much as it is about getting one's solar energy device installed and operating before the end of the year. This is because for state … Read more on Hawaii Reporter […]

  2. What Mr. Kalapa fails to discuss is the huge economic impact that a few tax dollars for solar rebates has saved by saving part of the over 8 billion (that is with a B) dollars a year that Hawaiian Electric Spends on Oil to generate electricity for this island. The fact is that for every dolllar saved by Hawaiian electric there is a $13.00 economic benefit to the State of Hawaii. To say that many pay for the few that can afford the solar benefit is allso false as the vast majority installing the solar are people in the middle to lower middle class. That is fact.
    In addition what the tax office should be doing is clamping down on the solar companies that have abused the tax law for their own economic benefit and also looking into how many of the solar companies from out of state are actually registered to do business in the state and are paying the proper taxes to be doing business in the state.
    Aloha from someone that knows the business better than any one.

  3. Giving out the occasional tax credit isn't really a bad thing. Hand them out too much though, and it really will drain any state or country's finances.

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