Taking a stand against tax credits

When I browsed through the proposed bills in the 2012 Hawaii legislative session, I was amazed by the number of tax credits being debated. Tax credits reduce the amount of tax you owe (unlike a tax deduction, which reduces the amount of taxable income).

Businesses wanted tax credits for everything from business relocation and high technology, biofuel production and ethanol facilities, hotel construction and medical research, to hiring and telecommuting. Individuals were less greedy (or had fewer lobbyists), but still wanted tax credits for things like college savings, electric vehicles, and parenting classes.

The intent is good (maybe): tax credits can help promote fledgling industries, encourage “good” behavior, and support “good” business practices. But in reality, they are also hand-outs to “favored” groups, often help only the wealthy (those who make enough earned income to take the tax credit), and make the tax code unnecessarily complicated.

Here are four tax credit guidelines I think we should follow:

1. No tax credits for personal choices, like parenting classes and college savings. Government should not influence or reward the personal choices we make.

2. No tax credits for buying things, like historic homes, energy efficient appliances, electric vehicles, and solar panel systems. Government should not influence our buying decisions, reward us for spending money, or require us to buy anything just to live.

3. No tax credits for private business activities, like hotel construction, small business investment, and new construction and renovation. Government should not reward “favored” businesses.

4. No tax credits for private business practices, like hiring, telecommuting, corporate mentoring, and wellness programs. Government should not influence or reward business decisions that would not be considered without the tax credit – unless the business practices are required by the government.

Instead of tax credits, here are four ideas for more effective tax policies:

1. A flat income tax rate. We need one tax rate for all levels of income, with a reasonable deduction for dependents, the elderly, and the blind and disabled. A progressive tax, where the more you earn, the more you pay, may sound fair; but that depends on your definition of “fair.” Plus, a progressive tax is hard to figure out and makes it easy to justify tax credits.

2. A minimum tax for low-income families. Everyone should pay a small amount for state services, because we all benefit from public projects. This could be in the form of a residency fee.

3. A 3-year, reduced tax rate. To encourage new businesses and companies that engage in research and development, we could offer a limited-time lower income tax rate.

4. Tax-free health, education, and retirement plans. To encourage personal responsibility, we should allow health, education, and retirement savings plans to grow tax-free. Withdrawals for approved expenses should also be tax-free.

What do you think about tax credits? Have tax credits made you buy something that you would not have bought otherwise? Would taking away tax credits change how you spend your money?

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