Tax Gains Unclear from Law Shelving Exemptions

By DePledge, Derrick | Honolulu Star - Advertiser, July 1, 2013 | Go to article overview

Tax Gains Unclear from Law Shelving Exemptions


DePledge, Derrick, Honolulu Star - Advertiser


To avoid a projected budget deficit, Gov. Neil Abercrombie and state lawmakers made the painful choice in 2011 to temporarily suspend general excise tax exemptions on nearly two dozen business activities.

The move was supposed to generate $173 million in fiscal year 2012 and $220 million in fiscal year 2013, the largest tax adjustment taken by the state during the recession.

But the state does not know how much money was actually generated. The state Department of Taxation, which had cautioned lawmakers that initial estimates were uncertain, puts the figures at $50 million for fiscal year 2012 and $70 million for fiscal year 2013.

Fortunately for the state, tax collections increased beyond expectations over the past two years as the economy improved.

Act 105, which expired with the fiscal year on Sunday, will go down as a lesson in the vagaries of tax policy.

"Unfortunately, it's more of a guessing game than it ought to be," said Richard Kahle Jr., chairman of the state Council on Revenues.

Suspending the general excise tax exemptions came only after lawmakers had exhausted smaller tax and spending cut options during the recession. Lawmakers had raised income taxes on the wealthy, the hotel room tax and the conveyance tax on luxury real estate deals to bring in new revenue while reducing spending on state programs to help close deficits.

By 2011, with the state still projecting a $1.3 billion deficit, lawmakers turned to the general excise tax, which is imposed on most business transactions and is the largest source of state revenue. Rather than raise the broad-based tax, which business leaders had warned would stall economic recovery, lawmakers suspended nearly two dozen exemptions that had been awarded to businesses over the years.

The exemptions included a subcontractors' deduction, a sublease deduction, the sale of liquor and tobacco to the federal government and the gross receipts from the rental or leasing of aircraft or aircraft engines used for interstate travel.

Some of the exemptions were meant to soften the pyramid effect of the 4 percent tax -- 4.5 percent on Oahu because of a rail surcharge -- particularly on business-to-business activity. Other tax breaks had been given to lure new businesses.

Abercrombie and House and Senate leaders withstood intense pressure from lobbyists for some of the state's most powerful business interests and approved Act 105 as a temporary, two-year tax adjustment at the rate of 4 percent.

But by September 2011, just two months after the law took effect, the Department of Taxation dramatically downgraded the revenue estimates. The department told the Council on Revenues that because of great uncertainty, the department was more comfortable predicting $50 million for fiscal year 2012, not $173 million.

The startling downgrade was based on a lack of reliable data, the likelihood that businesses would adjust behavior to avoid or minimize tax liability, and a grandfather clause in the law. Businesses were exempt if they entered into binding written contracts before July 2011 that did not permit passing on increased tax rates.

Once the Council on Revenues adopted the $50 million estimate for fiscal year 2012, that figure was used in the formula to peg future revenue estimates, which led to a $70 million figure for fiscal year 2013.

The Department of Taxation does not know the full revenue impact of Act 105. …

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