Hawaii Tax Foundation: Giving Out Tax Credits Costs Other Taxpayers Relief

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BY LOWELL L. KALAPA – At a recent discussion of what strategies should be adopted to improve the economic outlook of Hawaii, some of the participants advocated the use of tax incentives and, more specifically, tax credits as essential to attracting new businesses to Hawaii.

Unfortunately, those advocates are probably beneficiaries of the recent spate of tax credits and certainly would want those tax incentives to continue. From their biased point of view they can only see how those tax credits benefit their wallets. What they don’t see is the fact that unless government spending and programs are reduced to pay for those tax credits, lawmakers have to maintain the heavy burden of taxes on other taxpayers or in some cases raise taxes even higher or impose new taxes.


Certainly in the mind of some lawmakers is the thought that this money doesn’t exist until someone files a claim for it. Even then, many argue that it is money well spent if, in fact, the desired behavior is achieved, be it investing in a high technology company or building an ethanol plant or getting a family to install a solar water heater.

The problem is that when these tax credits are claimed, it is that much less money that will accrue to the state’s general fund. And if there are fewer dollars in the state general fund, where will lawmakers and administrators find the money to run the public schools, keep prisoners detained in prison, or for that matter eradicate pests like rodents?

What is even more troubling is that in many cases these targeted business tax credits where granted without limitation and that can literally bankrupt the state general fund. With no aggregate ceiling for all claims or for that matter limits on how much can be claimed by any one taxpayer, it is like granting a license to rob the state’s piggy bank. Once lawmakers approved such tax incentives and they became law, there has been little, if any, oversight and until recently lawmakers have not set any benchmarks to determine whether or not these tax incentives have achieved their desired outcomes like the creation of more jobs, the impact on the consumption of energy, or the production of ethanol.

Thus, these tax credits are nothing more than the backdoor expenditure of state tax dollars that must be paid for by other taxpayers who can’t qualify for the tax break. Under the state constitution the expenditure of tax dollars must be subject to the appropriation process, that is, lawmakers must, for each year of the biennium, vote on how much money will be spent on a specific program and what that money will be used for in providing public programs and services. If there are differences on how much should be spent on a certain program, then those differences have to be resolved before the money can be appropriated and spent.

In the case where those public funds are to purchase services from a private provider, the expenditure of those funds must be subjected to a procurement process where the work is put out on a competitive bid. The state or county sets the outcomes the contract is supposed to achieve and based on whether or not the bidder will be able to meet those outcomes or expectations, the contract is usually awarded to the lowest bidder with the logic that this is the best use of taxpayer dollars.

Such is not the case with these targeted business tax credits. Once adopted these tax incentives have no outcomes or benchmarks to achieve other than they look or sound like they fit the description of the type of qualified entity. As the media recently reported, many of the claimants of the Act 221 high technology tax credit had few, if any, employees. And it took years to get those who claimed the credit to report any data at all, claiming that to report such information would send a pall over the industry. So much for transparency.

What is more important, despite the claim by many of the advocates of these credits, is that they come at a dear price as we all learned this past session. Because there is no ceiling or limit to these credits, they can be claimed unbridled, like a gash in the Titanic, allowing the loss of revenues to flow without control or oversight to the point where lawmakers had to resort to tax and fee increases on certain taxpayers. Legislative advocates of the Act 221 tax credits, in fact, proposed raising the general excise tax rather than suspending the credits as a way to fill the huge gap in the state’s budget.

Although advocates of these tax credits would like to perpetuate them, taxpayers should realize that they exacerbate an already dire state budget and continuation of these credits could mean more tax increases in the future.