Manufacturing a (Tax) Problem

Manufacturing a (Tax) Problem

Take a moment and look over this graph of effective tax rates in Hawaii, divided by industry. No points for guessing what type of business the government is currently trying to lure into the state. It’s almost startling. In every category except Research & Development, the effective tax rate is at least 12% and goes as high as 26%. In the category of R&D, however, a refundable tax credit can actually drop the rate to -0.6%.  This is what all the political eloquence about economic development in our state has wrought–a great tax rate for R&D operations. Too bad that the costs on nearly every other industry continue to make Hawaii an expensive place to do business. The information comes courtesy of the Tax Foundation, which compared data across states and ranked them based on effective tax rates. The point of the survey was to understand the state tax costs that are faced by real-world businesses. Unsurprisingly, the excise tax and  its multiple layers of taxation had a big impact–especially on manufacturing: More than in other states, Hawaii’s sales tax (called the General Excise Tax) applies to sales between businesses rather than just to the end consumer. As such, manufacturing machinery is taxed in Hawaii, so the cost of equipment and other inputs for manufacturing firms is significantly higher in Hawaii than in other states.   Hawaii imposes some of the highest tax costs in the nation on both new and mature labor-intensive manufacturing, with effective tax rates of 16.9 and 14.8 percent respectively, both over 60 percent above the median rates nationwide. The sales tax on manufacturing machinery is a...
The Clouded Judgment of Tax Authorities

The Clouded Judgment of Tax Authorities

The greed of tax authorities seems limitless. Revenue agencies will often seek to extend taxes well beyond what was contemplated when legislation was enacted, in the name of securing ever more money for government. Some even go so far as to extend taxes to services even in the absence of a tax that actually includes the item or service at issue. For example, Chicago recently instituted a “cloud tax,” a new extension of the existing “amusement tax,” and “personal property lease transaction tax” that will apply to streaming and cloud-based services. At a whopping 9 percent, the tax is expected to generate $12 million in revenue per year–or rather, innovative companies and consumers will lose $12 million every year. The Windy City’s tech community has complained loudly about the impact this discriminatory tax will have on the city’s innovation economy. Streaming customers and cloud-dependent technology companies have effectively been told that they are not wanted. What is the “the cloud”? Cloud computing is the storage and access of data with multiple redundant systems to ensure that the data is not lost, and access to programs over the Internet rather than on a local hard drive. In other words, the cloud is remote access and storage, and is simply a metaphor for the Internet. But why the seemingly sudden interest in taxing “the cloud”? As reported in the Wall Street Journal, “With sales of DVDs, video games and traditional packaged software slumping for years, more state and local governments are eyeing technologies such as streaming video subscriptions and cloud computing to help make up for hundreds of millions of dollars or...
Who’s the Boss, Anyway? (Part 2)

Who’s the Boss, Anyway? (Part 2)

In November of last year, I wrote about a Colorado case that was before the U.S. Supreme Court. Colorado voters had limited the power of its legislature to enact taxing and spending bills, and some of its legislators sued, saying that the power of the legislature was being throttled unconstitutionally. The federal district court and the Tenth Circuit allowed the suit to go forward, and the governor appealed. At the time, I said that the underlying question is: Who’s the Boss? Does the government exist to serve the people, or do the people exist to serve the government? The Supreme Court has now weighed in on the issue. To explain what happened I’ll need to review another case in Arizona. In Arizona, the question was how to draw representative district boundaries. Over the years, the legislature had drawn the districts several times, lawsuits were filed claiming irregularities including Voting Rights Act violations, and the courts had to redraw the districts several times. Finally the voters were fed up and added a provision to the Arizona Constitution cutting the legislature out of the process entirely and leaving the process of district drawing to an independent commission. Not surprisingly, the legislature filed suit alleging that tasking the commission with redistricting was unconstitutional. On June 29, the U.S. Supreme Court upheld Arizona’s process by a 5-4 decision. The Court’s majority opinion written by Justice Ginsburg quoted James Madison saying, “The genius of republican liberty seems to demand . . . not only that all power should be derived from the people, but that those intrusted with it should be kept in dependence...
Clean Energy Equals $418M Tax Hike?

Clean Energy Equals $418M Tax Hike?

Hawaii’s clean energy goals are the most aggressive in the nation, according to the home page of the Hawaii Clean Energy Initiative (HCEI). Let’s find out just how aggressive some of these goals are. Who is HCEI? It might sound like an independent nonprofit but it’s not; it’s actually a state government program under DBEDT. It’s been in the news recently because it released a draft report (written with the help of the International Council on Clean Transportation, an independent nonprofit that was awarded a $100,000 contract by DBEDT in April 2014). This 173-page report, all paid for with tax dollars, has a lot of recommendations, but we will concentrate on one of them for now. The draft report notes that Hawaii’s fuel taxes are low compared to gasoline taxes in the European Union. (Ours were fourth highest among the U.S. states in 2014, but apparently that doesn’t matter.) The report says that using gasoline for motor vehicles has “substantial externalities” including energy security, air pollution, traffic accidents, and traffic congestion. So the State could increase the tax rate to account for the social costs and increase the cost competitiveness of technologies that use alternative fuels. It also says that because demand for gasoline is relatively inelastic in the short term, economists tend to regard gasoline taxes as an economically efficient means of raising tax revenue. It recommends that the state tax on gasoline be hoisted by up to 400%, for an additional 85 cents a gallon, which, it says, would bring in an additional $418 million per year. Translation: Motor vehicles use fossil fuel, which is not a...
And the Lowsman Trophy Goes to … Hawaii!!

And the Lowsman Trophy Goes to … Hawaii!!

You may have heard about Marcus Mariota, the “favorite son” from Hawaii who went on to win the Heisman Trophy and was then picked in the first round of the NFL draft. What you might not know is that there’s also a Lowsman Trophy, for the pro football player who is picked dead last in the draft. The player winning that trophy also gets the coveted title of “Mr. Irrelevant.” CNBC, the business news network, recently published its rankings of “America’s Top States for Business.” They score the 50 states on more than 60 measures of competitiveness, separated into 10 broad categories and then weighted based on how frequently each is used as a selling point when the states market themselves. This year the categories were workforce, cost of doing business, infrastructure, economy, quality of life, technology and innovation, education, business friendliness, cost of living, and access to capital. Hawaii was ranked #1 in quality of life. However, its scores in the nine other categories were either miserable or abominable, leading to an overall finish at #50, dropping one place from last year. We were ranked #50 in cost of living and cost of doing business, and #49 in infrastructure (just behind Rhode Island, last year’s Lowsman winner). Our highest rank in categories other than the one we aced was #36, for technology and innovation. One of the report’s authors observed that part of the problem is unavoidable. We are in the middle of the ocean, more than 2,000 miles away from the mainland and the bulk of U.S. resources. The same factors that make us an expensive place...