But the analysis by accounting firm
Grant Thornton finds the changes offer
little to struggling businesses

By Rob Perez
Star-Bulletin

Most of Hawaii's profitable small businesses and their owners would come out ahead under the tax overhaul being pushed by Gov. Ben Cayetano, according to a local partner with a major national accounting firm.

But the news isn't so good for the many small businesses losing money in Hawaii's ailing economy.

Alan Yee, partner in charge of the tax department for Grant Thornton's Honolulu office, analyzed the impact of the proposed tax changes on a hypothetical profitable retailer with $750,000 in annual revenue and determined that the business would save $23 in taxes over three years.

But factoring in the owner's tax liability, the savings -- buttressed by the proposed cuts in personal income taxes -- grows to more than $3,200, according to Yee.

He said other profitable businesses also would come out ahead, even those not subject to paying the corporate income tax.

But for small businesses losing money, the tax changes generally aren't beneficial, Yee said yesterday.

Because those businesses aren't making a profit, they pay no income taxes and therefore wouldn't benefit from the income tax reductions, he said.

And the 19 percent increase in the general excise tax would raise their tax liability if they can't pass the full increase to customers, Yee said.

"Assuming you can pass all of that on, it's a neutral effect," he said.

If the business owner, however, still draws a salary or earns other income unrelated to the business, the owner could realize an overall gain if the personal income tax savings more than offsets the higher GET liability, Yee said.

Yee presented his findings this morning at a symposium sponsored by the Chamber of Commerce of Hawaii. The symposium focused on the potential effects from the tax recommendations by Cayetano's Economic Revitalization Task Force.

Yee's analysis is in marked contrast to one done in December by Arthur Andersen, another national accounting firm, based on the task force's original recommendations.

In a presentation widely criticized as misleading by task force proponents, Arthur Andersen found that five of six hypothetical businesses would earn less profits because of the then-proposed tax changes.

Cayetano subsequently revised the tax recommendations, lowering both the amount of the excise tax increase and the tax breaks for corporations and upper-income households.

The current plan calls for a 25 percent to 40 percent cut in personal income taxes over three years, with lower incomes getting the biggest breaks; the creation of three upper-income tax brackets; a 30 percent reduction in corporate income and franchise taxes; and the 19 percent GET hike.

Under the old plan, the personal income cut was 40 percent at all income levels, the corporate tax was chopped 50 percent and the excise tax was to be raised nearly 34 percent.

Yee made several assumptions to determine the tax liability of the hypothetical retailer, including that the owner earns a $75,000 salary from the business. He also assumes that the GET increase would be passed to consumers.

But task force critics say companies may not be able to pass the full increase on, forcing the businesses to absorb that cost.

Lowell Kalapa of the Tax Foundation of Hawaii said Yee's findings underscore a key criticism of the plan.

Though the recommendations are being touted as a way to stimulate the economy and attract new investment to the state, Kalapa said businesses won't benefit enough to boost the economy.

While residents will be happy about their tax savings, the little gain a business sees -- he cited the $23 tax savings in Yee's example -- will hardly be an enticement for new investment, Kalapa said.

"This is not an economic revitalization package," he said. "This is a let's-keep-the-constituents-happy package."

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Full text of the Governor's
Economic Task Force recommendations.