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Gone With The Winds of Change

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By Lowell L. Kalapa
It is captivating to watch how positions change in the legislative arena depending on whose toes have been stepped upon and by whom.

At the start of the legislative session, those who advocate for the poor railed against the hike in the general excise tax as being the worst that could be done to the poor as this tax is the most regressive of all Hawaii’s taxes in that it takes a larger percentage of a low-income household’s budget than a family with a higher income. Now those very advocates are singing a different tune, turning in praise after praise on how a cut in net income taxes and an increase in the general excise tax will be beneficial to the poor.

Why the sudden about face? Well, now that lawmakers have gotten down to the business of trying to balance the budget, the reality of cutting spending has set in. Not wanting to be the bad guys by laying off public employee workers, the first target for cuts are those expenditures which won’t affect the public payroll. In this case, the purchase of service contracts are a good target because they don’t involve laying off public workers.

On the other hand, many of these purchase of service contracts represent privatization in its earliest form. Years ago, when it was decided that an unwieldy state bureaucracy could not adequately react to the changing social and health needs of the community, lawmakers decided that it would be best to have private providers of social and health services provide those services on a contract basis. Not only would this get the state out of providing a plethora of social services, but it was also viewed as allowing the state to be more responsive to the changing needs of the community.

Unfortunately, where lawmakers saw the purchase of service contracts as supplanting the provision of social services by public employees, public administrators viewed purchase of service contracts as supplementing public services. So instead of downsizing the public workforce providing social and health services, the public payroll in these areas continued to grow.

Now that these purchase of service contractors see their contracts on the chopping block, they are being persuaded to support the increase in the general excise tax just so that they will be assured funding for their contracts. But are they sure they will get that funding if they support the excise tax increase? It’s doubtful that the budget can remain in a “status quo” mode given the sharp decline in the economy.

Oh yes, and speaking of the economy, will the revitalization plan truly get the economy moving again? It seems the proponents have not really thought about how a net income tax cut combined with an increase in the general excise tax will affect the economic outlook of Hawaii. True, the net income tax cut will put money back into people’s pockets, and for those businesses which are still turning a profit, it will reduce their income taxes.

But what about the general excise tax rate increase? Well, proponents point to the fact that the net income tax cuts will be greater than the amount the excise tax increase is supposed to generate. Thus, they say, residents will be ahead of the game, because about 30% of the general excise tax is paid by nonresidents or visitors. Well, that might hold water if visitors were coming to Hawaii and spending as much as they did when the study that arrived at that statistic was made back in the late 1980’s.

What the proponents of the excise tax increase ignore is that the general excise tax affects every transaction that takes place in our state. Thus, an increase in the tax rate will add to the cost of the groceries you purchase at the supermarket as well as to the cost of building that addition on your store. While net income tax cuts will put money back into the pockets of consumers, the increase in the general excise tax will take it back out.

If the cost of living will increase for consumers, then it only follows that the cost of doing business in the state will also increase. If the whole point is that more and more businesses find it difficult to make ends meet, let alone make a profit, then shouldn’t changes in the tax structure help to reduce the cost of living and doing business?

And what about the poor? Guess what, they are the ones that are going to suffer because any increased revenues from a tax increase will go to preserve the public payroll first before being paid out in purchase of service contracts. All the poor will be stuck with is a higher cost of surviving.

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