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Invest or Spend?

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By Lowell L. Kalapa

     The other week, the Economic Revitalization Task Force had its day before the House Finance Committee to explain its proposals and in particular to explain why the legislature should cut income tax rates and raise the general excise tax rate.

Except for the Republican minority and one or two Democrat majority members, the Committee sat in relative silence. Despite the silence on the part of the majority of the committee members, the Task Force did not have an easy going in presenting the tax proposals. One legislator noted that his own business may have made millions in revenues, but the actual profit from that business amounted to just over a hundred thousand dollars.

 

 

  So why, the legislator queried, is the gross income tax, the general excise tax, being increased when it comes off the top, while the net income tax rates – which apply only if the business makes a profit – are being decreased?        He went on to point out that in factoring in the increased cost of the general excise tax rate increase, that “profit” subject to income taxes would shrink to less than $25,000. The point he wanted to make is that the general excise tax is a tax on the gross income of the business, taken out before any other expense be it for wages and salaries or materials needed in the business.

On the other hand, the cuts in the net income tax both at the individual and corporate level would make relatively little difference given that the profits from his business were pretty insignificant. So why, the legislator queried, is the gross income tax, the general excise tax, being increased when it comes off the top, while the net income tax rates – which apply only if the business makes a profit – are being decreased?

The official word is that the net income tax cuts will put money back into the hands of the taxpayer so that taxpayers will have the means to go out and stimulate the economy by spending those dollars. Ironically a few minutes later when the director of the business department got up to speak, that idea was contradicted.

The director of the business department went on to chide taxpayers saying that taxpayers need to curb their consumption and instead should be encouraged to save and invest more of their money. That, he said, is why the general excise tax rate is being increased, to discourage taxpayers from spending their money.

Whoa! Wait a minute, just a minute ago, the spokesman for the Task Force said that the personal and corporate income tax cuts were being recommended as a way to stimulate Hawaii’s stagnant economy. The net income tax cuts are supposed to put more money into the pockets of taxpayers so they can go out and spend those dollars thereby stimulating the economy. And now the business director is criticizing our spending and asking us, as taxpayers, to save and invest. What is the message here or is it they haven’t got their ducks lined up?

If nothing else, it would seem to validate the assumption that this is really not a well-thought out plan. If that is the case, then the increase in the general excise tax just might be detrimental and rather than lift the state out of this economic mess, it just might sink it lower as more businesses are driven out of business. And then what will the Task Force do?

Unfortunately, a lot of pressure is being brought to bear on lawmakers to pass the general excise tax increase. As members of the Task Force, the Speaker of the House and the President of the Senate are pledged to make sure the general excise tax rate goes up. The only possible hurdle in that road is if the constituents of those districts make their wishes known. If taxpayers do not agree with the increase, they should let their lawmakers know where they stand on the issue.

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