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Practical Changes Needed, Not Perception

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By Lowell L. Kalapa

As the legislative picture becomes clearer with each interest group forwarding its agenda, it is time to assess which of these proposals will actually do something about the sluggish economy.

The administration is touting its plan to cut personal income tax rates even further. The House is suggesting that the legislature pick up where they left off last year and cut corporate income and bank franchise tax rates in half. The state chamber agrees with that latter position but has also placed the issue of the pyramiding of the general excise tax on its agenda.

While all of those “tax reduction” suggestions are certainly tantalizing, in all practicality, the state probably can’t afford all of them. Especially in view of the fact that the state administration has submitted a budget that will leave the general fund with a balance of less than $40 million at the end of the biennium.

The price tags for each of these proposals range from a low of $40 or $50 million for the corporate income and bank franchise tax cut to more than $200 million for the personal income tax proposal. Some observers believe that this is a major consideration for the legislature which must balance the budget and accommodate one of these tax cut proposals.

However, the real question that must be asked about all of these tax proposals is which one of them will really stimulate the economy and turn it around. Of course, the proponents for each argue that their proposal is the one that will make the difference.

For example, the Governor argues that a further cut in the net personal income tax will put more money back into the pockets of consumers and therefore that money will be spent in the marketplace, thereby increasing economic activity. Not only that, a lower maximum tax rate will be attractive to workers in the high technology industry where six-figure salaries are not uncommon.

Supporters of the cut in the corporate and bank franchise tax argue that a 50% reduction in these tax rates will send a loud message around the world that Hawaii welcomes new investors and is ready to do business. The proposed tax cut would make Hawaii’s corporate income tax rates among the lowest in the country short of those states which do not tax income.

Finally, those who advocate a reduction in the pyramiding phenomenon argue that this aspect of the general excise tax adds to the cost of doing business in Hawaii and increases the cost of everything consumed in Hawaii. They also argue that few people understand how the general excise tax affects the economy because the cost of the tax is imbedded in all goods and services. As a result, this proposal rarely excites most people, yet its effects can be felt by all families in Hawaii.

But let’s stop to think about these proposals. Well, the personal income tax cut would put money back in people’s pockets. It might put Hawaii on par with other states which impose income taxes, but it still can’t compete with those states which have no income taxes. Besides, having more money in your pocket doesn’t address the fact that the cost of groceries will remain just as high.

Well, what about cutting the corporate and bank franchise tax? Sure, businesses would be elated that their income taxes are cut, but does it make a whole lot of difference to a company that isn’t making any profit? In this economy, the number of profitable companies are few and far between. For the person who is considering investing in the state, there is little likelihood the business will be profitable in its first years after start-up. So does the corporate tax cut do real good or does it merely improve the perception of Hawaii and make everyone “feel good.”

On the other hand, the general excise tax is indeed a cruel tax, taking its due without regard to profit. The pyramiding phenomenon has long been acknowledged as a major reason why things are so expensive in Hawaii. This is one option that could really help businesses turn a profit. Unfortunately, its price tag at $130 million may be a bit rich for lawmakers to swallow. But if lawmakers truly want to enact changes that help the economy, they may just have to swallow this proposal with a little political will.

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