How often have you heard the political rhetoric during this campaign season of “doing away with corporate welfare” or “meaningful reform of the financial industry” being bantered about at the federal level as opposing parties try to blame one another
How often have you heard the political rhetoric during this campaign season of “doing away with corporate welfare” or “meaningful reform of the financial industry” being bantered about at the federal level as opposing parties try to blame one another for the soaring deficits.
One political ad touts that additional financial aid for Hawai‘i’s public schools would have been paid for by closing corporate tax loopholes that send jobs overseas. But no one points out that it was the soaring cost of American labor that sent many of those jobs overseas, with or without tax loopholes.
Another notes that the federal government “bailed-out” the big Wall Street banks at the peak of the financial crisis but failed to “bail-out” the average homeowner faced with foreclosure. But no one points out that much of the moneys that went to prop up the financial institutions during the credit crisis have been repaid with interest and now it looks like the federal government may actually make a profit by the time all of the funds are repaid.
What is hypocritical is that many of these politicians are the same ones who, on the local level, pushed for targeted business tax credits be it for construction companies with the hotel renovation and residential renovation and remodeling tax credits in the early part of this decade, high technology tax credits, tax credits for the building of a “world-class aquarium” on the Ewa plain, tax credits for film making and digital media, or for the building of an ethanol plant. These tax credits are no better than the “corporate welfare” that these very elected officials continually rail against at the national level.
The bottom line is that both strategies come at the expense of all other taxpayers who cannot avail themselves of these windfalls. The advocates of these tax credits argue that there is no revenue impact to the state until someone actually undertakes the desired activity and then the credit accomplishes the desired goal. The problem is that with all of the state’s targeted business tax credits there was no oversight initially and no limit on the amount that could be claimed. As a result, in the case of the high technology tax credit, the cost of those credits shot up to more than $130 million for the 2007 fiscal year. No one imagined that the revenues losses could top a hundred million dollars, but observers now believe the Act 221 program will eventually cost the state well over a billion dollars by the end of its ten-year run.
And it might not be over as investors in high technology activities put money behind various candidates running for office this year. But that is the problem, the advocates do not recognize that while they land a windfall in tax credits, those tax credits must be paid for by other taxpayers. What is amusing is that this point was almost driven home this past session when state lawmakers tried to hike taxes on the insurance industry, probably one of the worst abusers of the Act 221 tax credits according to the local daily.
Creating “drop-down” subsidiaries to undertake qualified high technology research and development, the actual work was outsourced to workers who were not residents and, therefore, what jobs were created were temporary and did not benefit local workers. Having taken advantage of the Act 221 tax credits without creating the jobs many had anticipated the tax credit would create, lawmakers felt only justified to ask the industry to shoulder some of the burden to cover the general fund budget shortfall. However, the legislature backed down when industry spokespersons declared Hawai‘i’s insurance premiums tax rates the highest in the nation. Instead, lawmakers went after registration fees of insurance professionals.
So it is curious that at the national level provisions benefiting businesses are called loopholes that come at the expense of the taxpayer and the wonderful programs that federal taxes fund like education, and at the state level targeted business tax credits that benefit only a select few businesses and individuals are perfectly acceptable.
Advocates of these targeted business tax credits vehemently defend them as their “entitlement” and seemingly ignore the fact that the oppressively high tax burden must be perpetuated on all other taxpayers. Will these advocates of the targeted business tax credits be willing to pay a surcharge on their income so that they can continue to feed at the trough or will they realize that reducing the tax burden for all taxpayers will allow all boats to rise with the incoming tide?
• Lowell Kalapa is president of the Tax Foundation of Hawai‘i, a private, nonprofit, non-partisan, educational organization established to research issues confronting governments in the area of public finance, taxation, and public administration. It is supported entirely by private contributions. For more information go to: www.tfhawaii.org
