Quick Action Needed to Avoid Tax Hike

Despite all the discussion about how taxes will be cut even further this year, the truth of the matter is that there is a good possibility that taxes may go in the other direction.

Why? Because both the administration and lawmakers do not have the political will to make the necessary cuts in state spending. We know for a fact with respect to the budget that has been submitted by the state administration as the financial plan indicates that the state general fund surplus will drop below $40 million by the end of the biennium, June 30, 2001. This is well below the 5% “cushion” that administration officials told lawmakers last year is necessary for the state to maintain a good bond rating.

Since that time, several departments have submitted requests for “emergency funding.” The more significant requests have come from the department of education and the department of health. In the case of the latter, requests for funds to shore up the community hospital system and to address the Felix consent decree will require millions of dollars over and above what was requested by the administration.

Thus, if every request for “emergency funding” is granted in addition to the administration’s budget, the state will be wallowing in red ink well before the end of the biennium. Given that possibility, lawmakers have two choices: either cut spending or find more money. The administration has already forwarded its plans to raise new funds, a new tax on cars and raiding the rental car tax from the highway fund.

But what will the legislature do with those proposals? Caught between the rising tide of red ink and a stagnant economy, will lawmakers have the nerve – the nerve to cut spending or the nerve to raise taxes? Which path will they take? Will they offend public employee unions or will they risk the wrath of taxpayers?

This will probably be the most crucial choice of this legislative session. It is no longer a matter of cruising along, hoping that the economy will get better. It is obvious that Hawaii’s economy continues to slip into an abyss.

In a legislative hearing the other day, nearly two dozen bills that would adopt various changes to the tax laws brought forward a clearer picture of the dilemma facing lawmakers. The hearing was preceded by a statement made by the chair of the committee. He outlined that despite the need to make critical changes to the state tax structure, those changes had to be made within the constitutional framework that the legislature must adopt a state budget that is balanced.

So should taxpayers accept the excuse that the budget must be balanced? Or should they accept scraps from the table like targeted tax incentives? In no uncertain terms taxpayers should not expect anything short of a broad-based tax relief package such as reducing the pyramiding of the general excise tax. If lawmakers do not recognize the need for tax relief, then all hope for the economy will go down the drain.

Some officials may call that irresponsible, that is, to call for massive tax relief which may result in millions of dollars of lost revenues in the midst of the state’s financial crisis. But wait a minute, if one were to view tax reductions and tax cuts as one of the state’s spending programs, then it is a matter of choice. Lawmakers can choose more bureaucracy or they can choose to reduce the pyramiding of the general excise tax. They can choose between keeping the same top heavy bureaucracy or they can choose to lower income tax rates.

That’s what it comes down to, a matter of setting priorities. Given the state of the economy, it appears that most, if not all, taxpayers will agree that easing the burden of taxes has to be key to turning the economy around. Tax relief should be among the higher priorities for state spending and not an afterthought.