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Funding Government in a Dwindling Economy

posted in: Weekly Commentary | 0
By Lowell L. Kalapa

One gets a sense that with all the hype and muscle behind the Economic Revitalization Task Force, there seems to be an air of desperation as this event is termed a window of opportunity and a bold plan.

However, that characterization seems disingenuous when one realizes that this economic slump has been going on for almost seven years. In fact, it takes on a feeling of deja vu as we flip the channels on the television and are greeted with stories about the crisis in the Middle East much as we did in 1991.

It seems that the Task Force proposal takes a conservative route to tax reform by lowering income tax rates on one hand and making up the lost revenues by jacking up the general excise tax rate. This approach to tax reform to jump start the economy has been greeted with much cynicism by the community as taxpayers realize that while they may be getting a breakon their income taxes, they are not certain that the tax savings will more than offset the increase in the tax on their purchases.

Certainly, it seems that this approach is less than sincere although it is being touted as a means of exporting Hawaii’s tax burden by way of its visitors. It seems that in their rush to support the proposal, the Task Force members have overlooked the fact that state income tax burdens are also exportable via the federal income tax as a deduction against income for federal tax purposes. Thus, while proponents of the Task Force proposal may argue that some of the tab will be picked up by visitors with the increased general excise tax rate, some of the tax savings will be lost to higher federal income taxes.

The bottom line is whether or not the taxpayer will actually see a net reduction in taxes. And generally the answer is that the savings will be minimal at best as the cuts are not deep enough and the excise tax, which is not a deductible tax, is being increased.

The point is that most of the savings realized on the state net income tax will be chewed up by federal income taxes and the increased tax burden created by the higher general excise tax rate.

Thus, while the proponents of the Task Force Tax Proposal would like us to believe that there is a substantial savings in store for taxpayers, the savings will fall far short of those visions of windfalls.

So why does the general excise tax have to be increased? Well, the response is obvious. Elected officials cannot bring themselves to make the necessary cuts in state spending. So, instead of making those hard choices, the tax cuts proposed end up being the proverbial sop to Cerberus. So on one hand, they can look good to taxpayers and businesses by cutting taxeswhile on the other hand, reclaim enough money to keep government spending near status quo.

What elected officials don’t realize is that unless the proper dosage is applied, the patient cannot and will not recover. Sure one can give the ailing patient some medicine or bind the patients wounds, but if the infection is not properly addressed or the broken arm is not set correctly, the patient will not heal. Hoping that the modest cuts are bold steps when taxpayers have recognized that state government is out of whack is really a symptom of evading the real problem.

If the Task Force, and primarily those who are elected officials, do not have the courage to make those spending cuts, then let’s be honest with taxpayers. Just don’t cut the net income tax as much instead of making up the revenue by raising the general excise tax rate. At least that would be a more accountable action then trying to play with smoke and mirrors.

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