Business legislation useful for jump-starting dialogue
HOUSE BILL 3118, the "Responsible Business Corporation Act" introduced this year at our state Legislature, has succeeded -- at least in starting a conversation about the relative merits of trying to reduce the harmful social and environmental effects of business behavior via tax breaks rather than higher taxes and more rules and regulations.
In its current form, this legislation would create tax incentives for corporations that include a certain percentage of employees and members of the community on their boards of directors. The idea is to provide better representation of the interests of both employees and the general public in corporate decision making. However, based on commentary about this bill in local publications, I think so far it has generated more heat than light.
The legislation has drawn criticism from the Honolulu Advertiser, Lowell Kalapa of the Hawaii Tax Foundation and Midweek columnist and Republican political candidate Jerry Coffee. All have made the traditional argument that the primary social responsibilities of any business are to maximize profits and then pay their fair share of taxes -- leaving government and the nonprofit sectors to address any social and environmental problems that result from profit maximization. Kalapa also thinks that tax breaks of any kind "unfairly" skew the system.
Coffee went further and called this legislation the "worst business law ever." He reiterated the belief that maximizing profit is the most socially responsible thing businesses can do because this also maximizes economic growth, job creation and tax revenue for social and environmental government programs. Coffee asserted that to survive economically, all corporations already have to consider the interests of their employees, suppliers, consumers and the communities in which they operate. He further argued that the Hawaii business community already donates much money and time to charity.
Rep. Marcus Oshiro -- a co-sponsor of this legislation along with Reps. Robert Herkes and Jon-Riki Karamatsu -- defended this bill in a guest opinion piece in the Honolulu Advertiser. Oshiro's stated intent is to "grow" this sector of Hawaii's economy over time by using tax incentives similar to those previously created to attract captive insurance companies and -- more recently -- high-tech companies to Hawaii. The Star-Bulletin published the opinion of Dana Gold, a Seattle law professor who feels this legislation is "visionary" because it attempts to move away from the regulatory approach to protecting the public interest.
I agree with all of them -- at least in part. Measuring the cost-effectiveness of tax breaks for simply putting some employees and citizens on boards of directors might be problematic, but this is true of most tax incentives -- including Hawaii's high-tech incentives. It can be difficult to objectively and quantitatively assess their cost and benefits even if accurate data on the amount of tax avoided by firms which use the incentives are compiled and available to the public.
Furthermore, the arguments against this legislation ignore the fact that profit maximization often creates social and environmental problems that necessitate higher taxes to address these problems, and/or more government regulation of businesses to prevent them. Profit maximization also can result in fewer jobs and lower incomes under some circumstances. The concept of a corporation itself is a legal/political invention created primarily to limit liability and reduce business risk, while business law in general is a human construct, rather than a divine creation. As such, it will always be subject to corruption as well as improvement.
For better or worse, our tax laws are already replete with all kinds of incentives and disincentives for various types of behavior -- such as tax breaks for charitable contributions -- many of which were created to benefit businesses. The April 3 issue of Time magazine also included poll results indicating a strong majority of Americans prefer tax incentives to tax penalties and more regulations to reduce the negative environmental effects of business and personal activity. Finally, the Domini 400 stock index -- consisting of national and international corporations that satisfy some socially and environmentally "responsible" criteria -- has equaled or exceeded the performance of S&P 500 stock index in recent years.
Nevertheless, the immediate impact of this bill would be negligible. The version of the bill currently pending does not specify the dollar value of the proposed incentives and has an effective date of 2050. This is understandable if the bill is primarily intended to stimulate debate. But in current form, it might apply only to the approximately two dozen or so local publicly traded corporations based in Hawaii. Most of the thousands of businesses in Hawaii are either not publicly traded, not incorporated in Hawaii or not incorporated at all (that is, they are partnerships or sole proprietorships).
So I hope this legislation really does stimulate more thought -- and more thoughtful debate -- about how to improve comparative analysis of the cost-effectiveness of all tax incentives. I also hope it generates more discussion about how to structure socially and environmentally responsible business incentives -- such as existing incentives to use more local, renewable energy and to share ownership and profits with employees -- to make them more attractive to more local businesses, whether incorporated in Hawaii or not.
Tom Brandt has been an economic development specialist in Hawaii for nearly 20 years. He has written articles on comparative tourism, agricultural and high-tech economic futures in Hawaii. He studied strategic planning and comparative analysis of various economic development policy options as a Ph.D. candidate at the University of Hawaii.