Tax breaks review could be revealing


POSTED: Wednesday, March 03, 2010

Leery of the public response in November to across-the-board tax increases, state legislators are turning to end the exemption of nonprofit organizations and various other companies from the general excise tax, Hawaii's multilevel version of the sales tax. The Legislature should examine the potential damage before ending the exemption during difficult times for each category on its hit list.

A bill that has passed the initial stages in the House would end exemptions in more than 40 classifications, including sugar cane producers, interisland shippers of agricultural commodities, recipients of high-tech development grants and services of aircraft. The bill would restore the exemptions in 2015.

The bill would impose a 1 percent tax on income from affordable rental housing projects and organizations that provide administrative services to small businesses. Both enterprises are now exempt from the state's general excise tax of 4 percent (4.5 percent on Oahu), with add-ons at each level.

For example, ALTRES Inc. prepares payroll, health insurance and other functions for more than 2,000 Hawaii small businesses that are taxed for servicing costs, but it is not required to pay the tax on the amounts that go through ALTRES from employer to employee. Having to pay the tax on the pass-through amounts would be devastating, Barron Guss, ALTRES president, told a House committee.

Developers and owners of affordable rental housing need the tax exemption to keep their rents low, said David M. Nakamura, executive director of the Mutual Housing Association of Hawaii Inc. The tax exemption has been “;a successful incentive”; that would disappear, even if at the level of 1 percent, he said.

“;Repealing exemptions spreads the pain more evenly than raising the rate paid by those already subject to excise taxes,”; House Speaker Calvin Say told The New York Times. “;I've tried this before, and I've always gotten criticism for it. But in this environment today, all options are being considered much more seriously.”;

Say estimates that the proposal in its present form would raise $500 million to $750 million to help close a budget shortfall of $1.2 billion. The 1 percent charge is twice that in the original bill as introduced by Say.

The Times reported that revoking nonprofits' exemption from sales, property or other taxes is being considered in various states and localities. Honolulu's City Council is considering eliminating property tax caps on nonprofit organizations; the yearly tax now is capped at $100.

Gov. Linda Lingle has vowed to veto any tax increase. Kurt Kawafuchi, her tax director, warns that the tax exemptions “;were important at some point and served some purpose.”; Enactment of the bill may lead to answers to the question of why the exemptions were deemed important in the first place.