Rating: Making progress
- Hawaii is making progress because the state has adopted a plan for regular evaluation of tax incentives.
- The Legislature’s audit office will publish the first evaluations in 2018.
- To produce high-quality analyses, officials will need to overcome data collection challenges.
Hawaii evaluation law
Year enacted: 2016.a
Who evaluates: Office of the auditor.
Length of review cycle: 5 years for some programs, 10 years for others.
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In 2016, Hawaii enacted legislation requiring the Office of the State Auditor to periodically review tax exemptions, exclusions, and credits.b The first evaluations will be released in 2018. In a place where tax incentives have caused serious fiscal challenges, the information in these studies stands to help lawmakers ensure that these programs are serving the needs of the state’s budget and economy.
Other states have had success assigning legislative audit offices to evaluate tax incentives, including Nebraska and Washington.c Hawaii’s audit office has the right experience to follow these examples. In 2012, for example, the office documented problems with the design and administration of the state’s tax incentives for high-tech businesses.d
That audit and a follow-up report in 2015 showed that the state faces significant budget uncertainty from the high-tech incentives. Although lawmakers had closed the program to new participants years earlier, the 2015 report found that Hawaii had an ongoing obligation of hundreds of millions of dollars from the high-tech incentives, with little clarity as to when or if businesses might claim them.e Renewable energy tax credits have also caused budget challenges for Hawaii in recent years, as costs increased rapidly without any explicit decision by policymakers to expand the program.f Maryland has used evaluations to analyze whether adequate protections are in place to avoid these types of challenges—a model Hawaii could follow.g
Data collection could be a roadblock to evaluation in Hawaii. The Department of Taxation faces technological challenges collecting data and must comply with strict state taxpayer confidentiality laws that are more rigid than the requirements in federal law.h These limitations have created barriers to evaluation.i
Other states have worked to overcome similar challenges. For example, beginning with legislation enacted in 2016, Nebraska has tried to make it easier for evaluators to receive complete, timely data from the Nebraska Department of Revenue while protecting sensitive information.j Nebraska’s experience shows that designing effective evaluation systems is often an iterative process. Even if Hawaii’s first evaluations lack perfect information with which to analyze incentives, the state can improve the process over time.
- Hawaii Rev. Stat. Ann. § 23-71 to 23-81, http://www.capitol.hawaii.gov/hrscurrent/Vol01_Ch0001-0042F/HRS0023/HRS_0023-0071.htm; Hawaii Rev. Stat. Ann. § 23-91 to 23-96, http://www.capitol.hawaii.gov/hrscurrent/Vol01_Ch0001-0042F/HRS0023/HRS_0023-0091.htm.
- Nebraska Rev. Stat. Ann § 50-1209, http://nebraskalegislature.gov/laws/statutes.php?statute=50-1209; Washington Rev. Code Ann. § 43.136.055, http://app.leg.wa.gov/RCW/ default.aspx?cite=43.136.055.
- Hawaii Office of the Auditor, “Audit of the Department of Taxation’s Administrative Oversight of High-Technology Business Investment and Research Activities Tax Credits” (July 2012), http://files.hawaii.gov/auditor/Reports/2012/12-05.pdf.
- Hawaii Office of the Auditor, “Credits Continue to Tax the State: Follow-Up on Recommendations Made in Report No. 12-05” (September 2015), http://files.hawaii.gov/auditor/Reports/2015/15-11.pdf.
- The Pew Charitable Trusts, “Avoiding Blank Checks: Creating Fiscally Sound State Tax Incentives” (December 2012), 3, http://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_assets/2012/ pewtaxincentivesreportpdf.pdf.
- Maryland Department of Legislative Services, “Evaluation of the Sustainable Communities Tax Credit” (July 12, 2016), 81, http://dls.state.md.us/data/polanasubare/polanasubare_taxnfispla/ Evaluation-of-the-Sustainable-Communities-Tax-Credit.pdf.
- Jan Yamane (former acting Hawaii state auditor), interview with The Pew Charitable Trusts, March 11, 2016.
- Hawaii Office of the Auditor, “Audit of the Department of Taxation’s Administrative Oversight,” 29–30.
- Nebraska L.B. 1022 (2016), http://nebraskalegislature.gov/bills/view_bill.php?DocumentID=28631; Dan Watermeier, state senator, Nebraska Legislature, “Introducer’s Statement of Intent, L.B. 1022” (Feb. 5, 2016), http://nebraskalegislature.gov/FloorDocs/104/PDF/SI/LB1022.pdf.