Posted on: Friday, February 21, 2003

Tax credits due for a good, long look

In the economic decline that followed the Gulf War and the collapse of the Japanese bubble — and even more dramatically following the Sept. 11 attacks — there was a surge of interest in doing something, anything, to kick-start our economy.

One tool that gained strong favor at the Legislature was the use of tax credits, either to stimulate new business, encourage growth or renovation in existing business or hang on to business we were in danger of losing.

Properly used, tax credits are a useful way to encourage economic activity.

There are several fundamental rules that should apply in granting tax credits, however:

One is that they should not be used in a way that creates disparities; that is, "un-leveling" a level playing field. That happens when credits are offered to new businesses that are essentially offering what existing businesses already provide.

Yes, jobs are created and so forth. But if tax credits are made available, they should be made available to all like businesses.

A second principle is that credits make the most sense when they forgive tax receipts that would otherwise not exist because the business they help create would not otherwise exist.

And a third principle is that, with rare exceptions, economic stimulation tax credits should not be permanent. They should be reviewed regularly to see whether they continue to meet their stated purpose.

On that ground, then, it is positive news that the Lingle administration intends to do a rigorous analysis of the credits already on the books to see if they are working as intended. This review will include the high-profile Act 221, which is a tax credit incentive to high-tech businesses that put down roots here.

There are suggestions that the tax "cost" of the rash of credits recently approved far exceeds the economic (and tax income) benefits they produced.

This analysis should not be based solely on a dollar-for-dollar basis. That is, a tax credit may be worthwhile even if the short-term tax "loss" outweighs the economic gains it produces. In some cases, the credit must be treated as an investment that may cost us a little now but will pay off in the long term.

Other credits, however, may simply not have accomplished anything other than make the bottom line look better for someone. While it may be sound policy to reduce business taxes in general as a way of helping the economy, the state should not be simply picking and choosing who gets a break through credits.

Lawmakers have a long list of new tax credits before them this session. Given the shaky state of the budget, it is unlikely that many, if any, will pass. The analysis now being launched by the Lingle administration should give legislators a much clearer idea of what works, what doesn't and what is needed now.