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Downsizing of Government Has To Be Part of the Strategy

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By Lowell L. Kalapa

The work of the Sub-Committees of the Economic Revitalization Task Force will be completed this week and is expected to be presented to the BIG group as options that can be adopted as the strategy to help get the state’s economy back on track.

While it has yet to be learned what some of the other Working Groups are going to recommend, it appears that the Taxation Working Group will definitely have an agenda of tax cuts. There appears to be general agreement that the personal income tax needs to be reduced. Not only does it appear that the Working Group will recommend an option of broadening the brackets so that people don’t fall into the next higher bracket because they are earning a few more dollars, but it also appears that the Working Group will recommend that the top tax rate be lowered. At the bottom end, the sentiment is to increase the floor before families begin paying state income taxes to mirror that of the federal.

The Taxation Working Group is also concerned about the general excise tax and how the tax adds to the cost of living in Hawaii, particular when it tends to pyramid, imposing the tax on the previously imposed tax amount. Thus, the task force will suggest that the problem of the pyramiding of the general excise tax be addressed, especially as it applies to services. Concerned that the 4% tax puts Hawaii produced services at a price disadvantage on the world market, the Working Group will also suggest that services sold to a client or consumer outside the state be exempt from the 4% levy.

While there is general agreement that taxes need to be cut in order to stimulate the economy and make the state more attractive to investors looking to relocate businesses and jobs to Hawaii, some members are concerned about the substantial revenue loss implied by these tax cuts. As a result, one of the options places the tax cuts on the table together with an escape valve that basically says that if the loss of revenue needs to be recovered either in whole or in part, consideration should be given to raising the general excise tax rate.

A number of members of the Working Group initially did not understand this provision, thinking that to raise lost revenue was merely an alternative. However, after some discussion, those members realized that providing this “escape valve” merely allow lawmakers an “out” from the more difficult task, that of down-sizing government.

As a result, members added another option for Task Force members to consider and that is to undertake the net income and general excise tax reductions suggested, but in order to compensate for the lost revenues, they believe that policymakers must down-size government and make government operations more efficient.

When this option was put up on the board, some of the other members objected saying that to suggest an absolute loss of revenues would damage the credibility of the Working Group. Others argued back that if the first option to raise the general excise tax as a means of recovering the revenue was the only option on the table, would Task Force members and policymakers even consider down-sizing government to bring the size of government in line with what taxpayers are willing to pay for government in Hawaii.

One member of the Working Group pointed out that if the exercise was merely to shift the tax burden from one taxpayer to another, then little would be accomplished as the same number of dollars would be taken out of the economy as currently is being collected. Another member pointed out that part of the problem of the poor economy is that government has gotten so large that more of the economic wealth is going toward supporting that government that really should be reinvested in the economy to create jobs.

Finally, another pointed out that in the first meeting there was nearly unanimous agreement that taxes were too high and to recommend that taxes be cut only to be made up elsewhere, from other taxpayers, was hypocritical.

It will be interesting to see if the BIG Task Force includes the suggestion of down-sizing government in their final recommendation. If they don’t, it will be difficult to achieve the benefits of a reduced tax burden as the money will just be coming from another source. The next few weeks begs a close watch by all taxpayers. Will the Task Force, which includes the Governor and the leaders from the two legislative houses, have the political will to buy-in to a smaller and more affordable state government?

The decision made on that issue will have a direct bearing on whether or not your tax burden will be reduced.

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