During the past decade or so, as Hawaii muddled out of the economic doldrums of the 1990s and was beset with the economic repercussions of 9/11, lawmakers have sought ways to stimulate and encourage economic activity in the 50th state.
During the past decade or so, as Hawaii muddled out of the economic doldrums of the 1990s and was beset with the economic repercussions of 9/11, lawmakers have sought ways to stimulate and encourage economic activity in the 50th state.
The most attractive way for lawmakers to claim they did something for the economy is to grant tax breaks to certain taxpayers or industries. After all, these mechanisms could be adopted without lawmakers appropriating a dime of taxpayer dollars from the state budget. Because there was no way to accurately quantify how much tax breaks would cost the state, they took on an aura of getting something for nothing.
In hindsight, we learned those tax breaks had everything to do with how much the state had to spend, and as the economy took a nose dive, those lost revenues resulted in lawmakers needing to raise additional funds in order to meet the bare necessities of state services. Lawmakers did not resort to increases in the general excise tax or an across-the-board increase in the net income tax. Instead, they chose to target certain taxpayers and activities for tax increases and also resorted to fee increases.
Lawmakers should have learned a lesson from the spate of tax incentives they adopted during the first decade of this century. Those incentives sapped the state treasury and forced lawmakers to shift the tax burden to others. But tax incentives abound where there is an emotional appeal. The current fad to subsidize local farmers with events and campaigns that emphasize “farm to table” is an example. While there is nothing wrong with encouraging local produce and livestock consumption, the problem is using tax revenue to provide those subsidies and supports.
During the last session, a number of bills were introduced to exempt various agricultural activities from the GET, including slaughterhouses and processing of poultry and livestock, provided the product was to be consumed within the state. Generally, exemptions from the GET are granted when the tax would impose an unusual burden or cause a taxpayer to do business in an inefficient manner to circumvent the tax. Exemptions from the GET are also granted if the entity is a nonprofit or if the tax imposed would have a severe economic impact on the state’s economy. These proposed exemptions met none of these criteria.
It should be noted that the GET rate imposed on producing and processing is already levied at the 0.5 percent rate. Thus, the exemption would have had little financial gain for these taxpayers. The other point to remember is that the lesser rate provides economists, planners and industry officials with important information about the industry — its size, economic impact and growth statistics. This information would be lost if an exemption had been adopted.
On one hand, lawmakers are scrounging for money and attempting to raise funds through user fees and taxes on specific groups of people, while on the other hand, they are attempting to give away the state treasury with exemptions such as the one proposed for slaughterhouses and processing facilities. Lawmakers should remember that the tax system is not designed to provide a lure to attract taxpayers into doing or acting in some sort of unusual way but exists to raise funds necessary to operate government.
Instead of giving away the treasury with myopic tax breaks, lawmakers must pay more attention to the overall economic climate of the state which suffers from a continuing burden of taxes and regulations.
Lawmakers should remember that giving a tax break to one activity comes at a cost to all other taxpayers not so favored, unless they effect a commensurate decrease in state spending. They must ask themselves if there truly is an unusual tax burden borne by a particular industry or if the proposals are nothing more than pandering to a fad industry. There is no justification for proposals such as this, or any other, including those for high technology and research.
Lowell L. Kalapa is president of the Tax Foundation of Hawaii.
