Tom Yamachika: What The Auditor Had To Say About Tax Exemptions


About the Author

Tom Yamachika

Tom Yamachika is the president of the Tax Foundation of Hawaii.


In 2016, lawmakers came up with a law requiring the State Auditor to review exemptions, exclusions, and credits in the general excise, public service company, and insurance premium taxes.

Under the terms of the law, HRS section 23-71, the existing tax benefits on the books were divided into 10 chunks, with each chunk to be reviewed every 10 years. The auditor was supposed to figure out how much each tax benefit costs in terms of lost revenue and determine whether the tax benefit has achieved and continues to achieve the purpose for which it was enacted by the Legislature.

The auditor was supposed to start on the first chunk last year and finish the report before the start of the 2020 Legislature, but there was a delay.

HRS section 23-91, also enacted in 2016, requires the auditor to review tax credits, exclusions, and deductions in our net income-based taxes, namely the income tax and the financial institutions franchise tax. Those tax benefits were divided into five chunks with each chunk to be reviewed every five years, and the auditor is supposed to start on those chunks this year.

A screen shot from the cover of a recent report.

Auditor’s Report No. 20-09, issued on June 25, was the first of these reports. It reviewed six exemptions and seven exclusions.

“Exclusions,” the report stated, “remove revenues from certain activities that were never intended to be part of a broadly defined tax base. Excluded amounts generally are not included in a taxpayer’s reported revenues and are therefore not taxed.”

Examples are the exclusion for dividends and for income from the sales of securities, commodity futures, evidence of debt, and real estate in fee simple. The report observed that the Department of Taxation does not require that any of these amounts be reported on a tax return (and never did). That makes it tough to estimate the revenue impact of the exclusion.

Making Sense

Here, the auditor’s key finding is that the exclusions reviewed described kinds of income that were never supposed to be taxed in the first place.

We agree with the finding. The tax is supposed to be on the privilege of doing business, so excluding income not from business activity makes sense. The auditor requested that it be spared from reviewing these exclusions again, which also makes sense.

For the exemptions, the auditor was only able to find out in general what the exemptions were designed to do. To find the rationale for the subcontract deduction, for example, the auditor unearthed a conference committee report from 1970 saying that the committee hoped the exemption would result in a reduction in the cost of housing.

For this as well as most of the other exemptions, the auditor concluded that there was insufficient data to determine if the exemption was achieving the policy goal that the Legislature intended it to achieve, and asked that the Legislature do a better job of spelling out what it is trying to accomplish. Getting lawmakers to do that is a noble goal but may not be easy to accomplish.

The auditor reviewed six exemptions and seven exclusions.

The auditor did pass judgment on one exemption. An exemption for income from the operation of a stock exchange was enacted in 1988, apparently designed to attract a stock exchange to Hawaii to replace the Honolulu Stock Exchange that closed its doors in 1978. But no replacement stock exchange ever appeared.

Yet there were one or two handfuls of taxpayers who were claiming the exemption on their general excise tax returns anyway (which doesn’t necessarily mean that the claimants belong in the hoosegow; they might have confused this exemption with the exclusion for stock market gains). Maybe it is time to clean up and repeal this provision.

We also have one interesting fact to share regarding this report. The Tax Foundation of Hawaii was the only non-government organization that the auditor recognized (in the foreword section of the report) as providing cooperation and assistance.

We are honored by the inclusion but wonder whether other stakeholders, such as taxpayers and trade organizations, should have been consulted as well. More feedback probably would have resulted in a more useful report, with suggestions for improving the exemptions that are now on the books.

Community Voices aims to encourage broad discussion on many topics of community interest. It’s kind of a cross between Letters to the Editor and op-eds. This is your space to talk about important issues or interesting people who are making a difference in our world. Column lengths should be no more than 800 words and we need a photo of the author and a bio. We welcome video commentary and other multimedia formats. Send to news@civilbeat.org. The opinions and information expressed in Community Voices are solely those of the authors and not Civil Beat.


Read this next:

John Pritchett: Sinking Feeling


Before you go…

During a crisis like this, it’s more important than ever to dig beyond the news, to figure out what government policies mean for ordinary citizens and how those policies were put together.

This is perhaps the biggest, most consequential story our reporters will ever cover. And at no other time in Civil Beat’s history have we relied on your support more. Please consider supporting Civil Beat by making a tax-deductible gift.

Contribute

About the Author

Tom Yamachika

Tom Yamachika is the president of the Tax Foundation of Hawaii.


Latest Comments (0)

How about the confusion on the PPP taxes, or are they not taxed?"Honolulu Stock Exchange" that sounds like an oxymoron. If it didn't close down, I could see that the last stop of the Honolulu Rail would appropriately be right at the front door of the stock exchange.

Joseppi · 6 days ago

Wish I could exempt my 3rd & 4th quarter estimated tax payments since I am certainly not getting any services from the 1st & 2nd quarter payments to the State. I see no financial accountability from our spendthrift kleptocracy.

TomCG19 · 6 days ago

Join the conversation

About IDEAS

IDEAS is the place you'll find essays, analysis and opinion on every aspect of life and public affairs in Hawaii. We want to showcase smart ideas about the future of Hawaii, from the state's sharpest thinkers, to stretch our collective thinking about a problem or an issue. Email news@civilbeat.org to submit an idea.

Mahalo!

You're officially signed up for our daily newsletter, the Morning Beat. A confirmation email will arrive shortly.

In the meantime, we have other newsletters that you might enjoy. Check the boxes for emails you'd like to receive.

  • What's this? Be the first to hear about important news stories with these occasional emails.
  • What's this? You'll hear from us whenever Civil Beat publishes a major project or investigation.
  • What's this? Get our latest environmental news on a monthly basis, including updates on Nathan Eagle's 'Hawaii 2040' series.
  • What's this? Get occasional emails highlighting essays, analysis and opinion from IDEAS, Civil Beat's commentary section.

Inbox overcrowded? Don't worry, you can unsubscribe
or update your preferences at any time.