The truth about growing the pie

On occasion, I’ve testified on tax bills before our Legislature. This past session, there were many tax expenditure proposals to allow credits and incentives to select groups or specific activities. I said that whenever credits and

incentives take away revenue, that money needs to be made up – usually by the rest of us. “Not so,” the Department of Business, Economic Development and Tourism testified. “We can make up the revenue by simply growing the tax base.”

Theoretically, DBEDT’s premise is true. If we stimulate business so it produces more revenue and pays more tax, then the revenue lost to the incentives can be made up. But imagine going to your friendly neighborhood moneylender about your delinquent loan payment and saying, “Don’t worry. I’ll get a job that pays 30 percent more than my current one and pay off your loan!” The response, of course, is likely to be, “Fine, but you still need to pay your bill now!”

We may be able to grow the pie ultimately, but it’s a process that takes time. And someone has to pay the current bills while we wait for the pie to grow.

Nevertheless, growing the pie is a worthwhile goal. How do we get there? As a way of getting to the answer, suppose we focus on the manufacturing sector, which was identified by the Chamber of Commerce this past legislative session as one especially worthy of assistance.

A recent survey conducted by the magazine IndustryWeek and the National Association of Manufacturers noted that the top business challenges continue to be rising health care costs and an unfavorable business climate. When asked about policy priorities for the next few years, slowing entitlement spending, finding a long-term budget deal, reducing regulatory burdens and controlling health care costs were at the top of the list. One survey respondent had an interesting observation that seemed to capture the mood: We need fewer Democrats and fewer Republicans and more smart people that are willing to tackle the longe-term issues with compromise. Not as a bulldozer, but something that all Americans can believe in and actually trust.

Similarly, Hawaii should strive for a government or regulatory environment that people can believe in and trust. To do that, I recommend that we stick to the basics: Enact laws and rules that are clear and easily understood. Don’t use vague or misleading language.

It’s OK to use specialized concepts from other areas such as federal law or regulatory law because it can be really difficult to define your own concepts. For example, many of the credit bills this past session awarded credits based on cost but failed to define cost. How about using depreciable basis, which is a complex but well-known tax concept?

Don’t change the rules in the middle of the game or even give the appearance that the rules are changing. If a law is vague and some taxpayers seem to be taking liberties with it, there is a great temptation to clamp down and make life harder for everyone. But that can defeat legitimate expectations, fuel distrust and give the impression that the state was engaging in bait and switch from the start.

Be true to legislative intent. Advocates in both the public and the private sectors try to convince lawmakers and agencies to apply a law in areas it wasn’t intended for. We should resist the temptation and be true to the interpretation that addresses what the law sought to address and stop there.

Once we have created an environment that we can believe in and trust, we would have eliminated one of the barriers that are keeping us from being internationally competitive and improve our chances of actually growing the pie.

* Tom Yamachika is the interim president of the Tax Foundation of Hawaii.