Price of Paradise

During this year's legislative session, lawmakers approved a $75 million tax credit to build a resort, aquarium and marine research facility at Ko Olina, but Governor Cayetano vetoed the measure. Sen. Colleen Hanabusa says the governor missed the legal deadline for vetoing bills and is challenging his action in Circuit Court.

Tax policy
with a purpose

Hawaii lawmakers have proposed tax credits to encourage CPR classes, contributions to domestic violence programs and using hybrid automobiles. They've boosted "sin taxes" to penalize smokers and liquor consumers. The "Price of Paradise" asks, should tax policy be an economic carrot for selected businesses or a stick to discourage certain behaviors? Or should we each just pay our fair share?

John Flanagan
Contributing editor

Tax credits useful | Don't force subsidy

POP radio starts tonight

Starting tonight, "Price of Paradise" takes to the airwaves with a call-in radio talk show keyed to the weekly topic.

Who: Host: John Flanagan. Guests: Sen. Colleen Hanabusa and retired state tax director Rick Kahle.
What: A debate on tax credits and "sin taxes."
Where: 1420 AM
When: 8 p.m. tonight.
Join the debate: Call in comments or questions to 296-1420 or toll-free from the neighbor islands, 1-866-400-1420.



Tax credits are
useful tools to stimulate
economic development

By Colleen Hanabusa

AS ANNOYING as taxes are, we all grudgingly concede they are necessary for government to operate and provide essential services. The debate is over how much and what kind.

Many critics analyzing Hawaii's state tax policies cite their impact on the business atmosphere and observe that taxes are tools used to penalize certain activities and to incite others. We readily agree that some taxes, such as "sin taxes," are penalties. For example, the tobacco tax serves to discourage tobacco use while providing the funding to mitigate its effects upon the general population.

Of late, the Legislature has used tax credits as tools to encourage economic development -- incentives to attract new industries and enhance existing ones. The debate is whether encouraging a specific activity justifies the potential loss of revenue.

Opponents argue that the jobs and future investments come at too high a price. Proponents say there is no revenue loss, since the state would not have enjoyed these revenues anyway unless the credit was granted.

TAX CREDITS are purposefully targeted and beneficiaries are subject to scrutiny. Every tax credit proposal must include a cost-benefit analysis guaranteeing jobs and investments into the future.

When legislators look at tax credits, we make certain assumptions. The first is that the economy requires stimulation and that government must take an active role. Stated another way, we assume the industry in question will not develop in Hawaii without tax credits.

Proponents disagree on the purpose of tax credits. Some say they should be used only to encourage new industry, as was the case of the high-tech industry tax credit. I disagree. Tax credits should be used to stimulate the economy, whether or not the industry exists.

The high-tech tax credit is a prime example. Although it was intended to develop a new industry, more than half of the almost $30 million claimed between July 2001 and March 2002 went to the producers of the surfing film "Blue Crush."

Hawaii's film industry has existed since before tourism became the state's major industry. Films and television create jobs and there is no better promoter of Hawaii. Some say "Hawaii Five-O" and "Magnum, P.I." did more for tourism in Hawaii than all the taxpayer money ever spent on marketing by the Hawaii Visitor and Convention Bureau.

SIMILARLY, the much-discussed Ko Olina tax credit is good policy. When drafted, it addressed the flaws in the high-tech law. For example, the Ko Olina bill capped the credit allowed in any given year at $7.5 million. Compare that to the $15.7 million taken by "Blue Crush" -- which, ironically, was filmed at Ko Olina.

The Ko Olina tax credit's total entitlement would have been $75 million. More important, the director of the Department of Economic Development and Tourism, Seiji Naya, estimated its dynamic impact would exceed $180 million, stimulating development in West Oahu.

For too long, we have said Kapolei is the second city and Ko Olina is Oahu's second resort destination. Neither the state nor the city has yet taken action to ensure that Kapolei does not become just another suburb or Ko Olina another Kuilima, which never became the North Shore's economic engine.

Tax credits, such as those proposed for Ko Olina specifically to construct a world-class aquarium and a marine science and mammal research facility, help the state's economic engine, which is in dire need of overhaul. If government can use tax credits to attract new industry, it can use them to enhance proven ones, too.

Let's stay committed to our plans and dreams. Kapolei is the second city and Ko Olina is the second resort destination. It is time to invest in the Leeward Coast and to open the door of economic opportunity to its residents and the rest of the state.

State Sen. Colleen Hanabusa (D, Waianae) represents Oahu's Leeward Coast and was a leading supporter of a $75 million tax credit bill, vetoed by the governor, to spur construction of an aquarium and resort complex at Ko Olina.



Taxpayers shouldn’t
be forced to subsidize
business development

By Lowell L. Kalapa

NO ONE is casting stones at those who try to bring home the bacon, especially if the bacon is going to help improve the bottom line. Indeed, that is what advocates of tax incentives, tax credits and tax exemptions try hard to do: Bring home the bacon for themselves.

There also are those who would like to use taxes as disincentives, to deter certain behaviors by imposing punitive taxes.

In recent years, many tax incentives have been promoted as a means of stimulating the economy. Because elected officials don't know what to do to repair the economy and few, if any, understand what is good tax policy, they have resorted to quick fixes in the form of tax incentives and, in some cases, disincentives.

Tax credits have no relationship to the burden of taxes borne by these taxpayers. They amount to nothing more than outright subsidies. Ironically, these proposals ensure that the economy will get worse, not better.

INSTEAD OF improving the tax climate for all taxpayers, policy makers have singled out specific types of activities for tax credits, tax exemptions and exclusions of income. Policy makers, somehow sold on the idea that these tax breaks will "jump start" or "kick start" the economy, seem to ignore the fact that someone else will have to pay for these tax breaks.

They will either have to keep taxes at the same level or increase them to cover the shortfall, or reduce expenditures, which is something they don't like to do. Even if the hype is true and the credit will create more economic activity, more jobs and more revenues, what about the taxpayers who don't get the tax break?

Using the tax system to discourage certain behaviors is equally objectionable. Proposals to increase the taxes on alcoholic beverages and cigarettes have appeared regularly in recent years as revenues have shrunk. They are submitted on the pretext that raising these taxes will discourage consumers from unhealthy habits.

Instead of discouraging use, all higher tax rates do is to skew consumer buying patterns. They send purchasers underground or force consumers to "trade down" to cheaper brands. Not only does this adversely affect the dollar volume of sales, but it also forces consumers to find other sources of the product.

TAKE THE case of cigarettes. When taxes climb, smokers not only seek out untaxed product locally (from friends and family in the military), but some also resort to purchasing untaxed product from outside the state. This hurts local vendors and reduces cigarette-tax and general excise-tax receipts.

Good tax policy calls for fairness and equity. Cutting taxes for everyone ensures that all boats rise with the tide. Selecting only a few boats to rise ensures that the others will sink. Tax breaks for the few keep tax burdens high for those not so favored.

Tax credits are "back door" expenditures of public funds that allow elected officials to escape accountability. Does anyone really know how many people will claim the credit and therefore the cost to the treasury? Once they are enacted does anybody pay attention to the cost of these credits?

Singling out particular industries or products for credits sends a bad signal to potential investors in Hawaii. It says policy makers are more than willing to single out taxpayers, either for a boon or for an added burden -- and it might be them!

The long and short of it is that targeted tax incentives and tax increases ensure that the price of paradise will rise.

Lowell K. Kalapa is president of the nonprofit Tax Foundation of Hawaii, which reviews every tax bill introduced in the Legislature to inform and educate law-makers and the public about proposals under consideration.




Price of Paradise
The Price of Paradise appears each week in the Sunday Insight section. The mission of POP is to contribute lively and informed dialog about public issues, particularly those having to do with our pocketbooks. Reader responses will appear in Thursday's paper. If you have thoughts to share about today's POP articles, please send them, with your name and daytime phone number, to, or write to Price of Paradise, Honolulu Star-Bulletin, 7 Waterfront Plaza, Suite 210, 500 Ala Moana, Honolulu, HI 96813.
John Flanagan
Contributing Editor

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