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Eschewing Tax Reductions Can Be Dangerous

posted in: Weekly Commentary 0
By Lowell L. Kalapa

The Working Groups of the Economic Revitalization Task Force will be making their reports to the Task Force all this week and next and like it or not lawmakers and other elected officials will hear a common thread running through almost all of the reports – cut the cost of government!

The Taxation Working Group is very specific about what it believes needs to be done in order to get the economy going again – cut taxes. That includes a lowering of the top rate of the personal income tax while broadening the brackets and raising the income threshold at which the top tax rate is imposed and getting rid of the pyramiding of the general excise tax and exempting exported services from the 4% tax.

Of course the Working Group isn’t so naive that they don’t know this is going to cost money. In fact, they say it right up front that they know their recommendations are going to lose a lot of revenues for state government. However, the members of the Working Group were not willing to go along with the suggestion of some lawmakers on the task force who suggested that the general excise tax rate be increased to make up the lost revenues. No, the Working Group will recommend that the cost of government be cut instead of trying to make up the revenues.

Well, it appears that the message is not sinking in for some lawmakers and administration officials. The reaction upon hearing the recommendation that taxes be cut is something akin to a squealing pig – “Cut taxes, no way!” The other reaction is one of denial – “Cutting taxes isn’t going to solve the economic problem!” Still others denounce the idea as something on the verge of taking food out of the mouths of starving children.

This is really unfortunate as these attitudes will stand in the way of making real changes to the business and tax climate of Hawaii. To say the least, these attitudes reflect the short-sightedness that has plagued our elected officials and community leaders. While they whine that they won’t have the money to deal with education and social welfare issues, they are ignoring the fact that many of the problems which plague the education system and create the social problems are a result of a poor economy. It is an economy where the cost of living is so high that parents must work two or three jobs to make ends meet, who then have little time to spend with their families, let alone time to help their children with their homework.

Those who decry the move to reduce taxes are really not in touch with the communities they supposedly represent. Similarly, they also seem to ignore the fact that the very people they represent are the ones who are slaving under that heavy tax burden.

It is interesting to note that when state government spending is measured as a percentage of Gross State Product (GSP), the slice of the pie that state government spending represents has grown way of out proportion compared to what it represented for the first three decades of statehood. During that period, state government spending averaged about 14.2% of GSP. Beginning in 1991, that percentage mushroomed to more than 15.9% of GSP and has been rising ever since such that in 1995, state spending as a percent of GSP represented 17.7%. If one uses the 14.2% as the normal size of state government spending, then the 17.7% represents 3.4 points above the norm. With every percentage point worth $327 million, that means state spending was $1.1 billion over what should be the “normal or acceptable” level of state expenditures.

If the Economic Revitalization Task Force, which includes the governor and two legislative leaders, tries to weasel out of cutting taxes, there is no doubt that there will be serious consequences to pay. There is no doubt that the man and woman on the street believe that excessive state spending and the high burden of taxes it requires is a major reason for the economic malaise that Hawaii now faces.

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