Posted on: Thursday, March 3, 2005

Bill seeks analysis of tax breaks

By Sean Hao
Advertiser Staff Writer

Each year, the state forgoes about $500 million in tax revenue by giving income tax credits and general excise tax exemptions to companies and individuals.

The tax breaks were provided by lawmakers in years past primarily to spur economic development, but no one can say for certain how many jobs have been created by the tax breaks.

That could change under a bill that's making its way through the Legislature. House Bill 1720 would require a biennial cost/benefit analysis of myriad tax breaks by a state tax advisory panel.

The bill comes amid concern about a lack of accountability for incentives granted to a variety of special-interest groups including the technology, television and film, and hotel industries.

"I see it as a problem that we are poking so many holes in our state budget and we're about to poke more holes," said Rep. Glenn Wakai, D-31st (Salt Lake, Tripler), who introduced the bill, which was passed by the House Finance Committee this week. "To me, we should be plugging the pukas in our state coffers before we talk about raising taxes."

The Legislature also is considering raising general excise tax collections by $300 million annually to pay for a rail transportation system

The high number of tax breaks given to Hawai'i businesses and a lack of cost/benefit data drew criticism in a 2003 report by the state's Tax Review Commission.

The commission's most recent study in 2003 recommended a regular review of tax credits and exemptions and the jobs they create. Two years later, just what the state gets in return from business incentives related to economic development remains largely unknown.

The proliferation of tax breaks makes it increasingly difficult to predict state tax revenues, according to the commission's report.

Between 1957 and 1969, the state had only three tax credits. As of 2003, there were 20. In addition, revenue from more than 40 types of transactions are exempt from the state's general excise tax.

The various tax credits cost the state an estimated $103 million in the fiscal year ended June 30, 2003, with about $43 million of that loss the result of corporate and insurance company tax credits and nearly $60 million attributed to tax credits for individuals.

Separately, exemptions to the general excise tax cost the state an estimated $382 million in 2003, the most recent data available.

To put that in perspective, the state government's two-year budget exceeds $7 billion.

There currently is no accounting of how many jobs were created via tax credits and exemptions.

In one of the few subsidy studies conducted, technology tax credits resulted in an estimated 600 to 800 new technology jobs in 2002 at a cost of between $105,000 and $140,000 in lost tax revenue per job, according to state officials.

HB 1720, which would require a cost/benefit analysis of tax incentives, is scheduled for a floor vote in the House next week. If the House passes it, the bill will need Senate approval and Gov. Linda Lingle's support to become law.

The Lingle administration does not support the bill. A similar bill introduced last session failed to advance.

"The concept and the idea (of a cost/benefit analysis) I think is good," said Sen. Will Espero, D-20th ('Ewa Beach, Waipahu), chairman of the Senate Business and Economic Development Committee.

Even if the bill becomes law, a report may not come for years. That's because the current version of the bill requires the all-volunteer Tax Review Commission to conduct the analysis. The commission's next report isn't due until 2008.

The debate over the benefit of tax breaks comes as an increase in state revenues has lawmakers considering creating a slew of new tax credits.

"There are credits all over the place," said Lowell Kalapa, president of the nonprofit Tax Foundation of Hawai'i. "Where are we going to find the money for all of this?"

A study of the effectiveness of such economic development measures is long overdue, Kalapa said.

Reach Sean Hao at shao@honoluluadvertiser.com or525-8093.