Solar and wind energy system owners, movie and TV producers, the impoverished, those who hire workers in certain zones, those who buy durable goods to use in a business. These seemingly disparate groups have something in common - they are all beneficiaries of tax credits. Those who seek to enlarge or expand those credits at the Legislature frequently find the Tax Foundation opposed. Why is that?
Tax credits have been adopted for the above groups and more, and have been proposed for countless others. Each is there to provide some kind of relief to those that need it or encourage behavior that society thinks is good.
Credits and incentives are common in every state, including ours. But one needs to remember two things.
First, most credits act like a blank check drawn on the state treasury. The credit statute establishes criteria and anyone who meets the criteria (or thinks they do) can claim the benefits. If credit criteria are not tightly drafted, creatively thinking taxpayers or tax professionals come up with interpretations that make jaws drop. News surrounding the Act 221 high-tech credits and the renewable energy technologies credits gives us some examples. The result often is that the actual revenue impact is either far greater than anticipated (as one prominent legislator stated, "They took us to the cleaners!"); worse, it simply can't be measured; or even worse, it is exacerbated by a huge investment of administrative resources (such as tax auditors and attorneys general) to administer the credit (i.e., stop the bleeding).
Second, the credit necessarily causes a reduction in funds otherwise available to government. This means that either government has to get smaller (which hardly ever happens) or the rest of us who are not favored by these credits will need to pick up the slack somehow. And this part can and often does get ugly.
This year we are looking at legislative proposals to enact credits for all kinds of things. Hotel renovation and reconstruction is needed to keep the Hawaii brand fresh and competitive, according to SB 2968. Infrastructure tenants displaced by the Kapalama terminal modernization project need to be incentivized to reinvest in the area under HB 1702 and SB 2322. Location efficiency, namely meeting standards for affordable workplace housing or accessible and affordable mass transit, also needs to be encouraged, according to HB 2085. Low-income household renters should receive additional assistance if they are elderly, according to HB 2285 and SB 2835. There are others.
What our lawmakers need to do is to consider the purpose of each tax credit, determine whether each pays for itself in terms of actual dollars or in helping the greater community, and, perhaps most important, ensure that the public has access to information about what these credits are, how much they cost and how they are justified.
* Tom Yamachika is the interim president of the Tax Foundation of Hawaii.