Ailing Economy Begs Comprehensive Reform

Last week, we took a look at what lawmakers “accomplished” in the way of legislation and the conclusion was that while the high profile issues were addressed, the most pressing issues of the economy and the business climate were not.

So, if what the administration proposed and what the legislature did was a piecemeal approach, what should lawmakers do during the interim to insure that there is a comprehensive plan to stimulate the economy? Well, before lawmakers can talk about tax breaks or tax relief, the spending that requires those tax dollars needs to be addressed. If the level of spending cannot be reduced, then the tax dollars which pay for that spending also cannot be reduced.

So when calls for reducing the size of government are made, it is not a matter of reducing the size of the payroll or the elimination of various programs as much as it is a matter of setting priorities. Because elected officials view spending public dollars on a particular program as satisfying some specific constituency, they are less likely to give up tax revenues which go to pay for those programs then they are to reduce tax revenues.

But if lawmakers were willing to look at cutting taxes as “spending” on the economy, call it a state program to help businesses and workers, perhaps they could then view it as a competing state funded project or program. The constituency of this “program” is the taxpayer. The beneficiaries are taxpayers, workers and businesses.

So what sort of taxes should lawmakers consider for reductions? The broadest base tax that will benefit both businesses and individuals is the net income tax. The net income tax rates, brackets, personal exemption and standard deductions have not been adjusted in nearly thirty years. In fact, because the rates and brackets were not adjusted in 1987 when the income tax base was broadened by the federal changes in the definition of income, Hawaii taxpayers have actually experienced a tax increase. This is especially true when lawmakers took away a part of the food tax credit that was supposed to offset the base-broadening effects of the 1987 changes.

How will a decrease in the individual income tax benefit businesses? There is a two-fold benefit. First, because workers will have more to “take home” in their paychecks, there is less pressure to ask for pay increases. In a sense, a reduction in the withholding is like a “pay increase” for workers. Second, because workers will have more dollars to spend, businesses who depend on customers buying their goods and services should see more business. With more dollars being spent, businesses will have more capital to invest in their operation and create more jobs. With more dollars moving around in the economy, tax revenues should rise accordingly.

That is not to say there aren’t some changes that could be made to the general excise tax that weighs heavily on business. However, they tend to be more structural in nature such as the pyramiding of the tax on services. While the legislature did address the issue as it pertains to real property leases, the larger problem of services which are resold as a part of a subsequent service continues to plague the business community.

What is more important in all this is the fact that the tax reductions and structural changes must be broad based, affecting all businesses and individuals in the community. Thus, unlike what lawmakers did this year, these changes help to improve the overall climate for all taxpayers and not just for the select few.