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Your Tax Cut is the Reason Why the State is in the Red

posted in: Weekly Commentary 0
By Lowell L. Kalapa

In recent days, the state administration has finally owned up to the fact that the state is indeed headed for difficult times.

The administration’s reasoning for this problem is not so much because the spending is outpacing the revenues as much as they point to the fact that because taxes were cut, the state will not raise the dollars needed to keep government operating. The implication is that if it hadn’t been for the “largest tax cut in the history of the state” the state wouldn’t be faced with all that red ink.

Isn’t it nice to know that overburdened taxpayers are the reason why the state can’t balance its books? Not a mention is made of the fact that it was because taxpayers paid an awful lot in taxes that people fled the state, that businesses couldn’t survive in Hawaii and went elsewhere if not into bankruptcy?

So let’s see if we can understand this reasoning. If taxes had not been cut, the state would have had enough money to keep state government operating. If tax rates were not reduced, people would be working hard at their jobs paying those taxes. If taxes had not been cut, businesses would be doing landslide business, bringing in profits hand over foot. If taxes had not been cut, investors would be breaking down the doors to the state trying to start up new businesses or building new hotels and office buildings.

Now what is wrong with that picture? Hawaii has long held the fifth highest spot in the nation in terms of per capita state and local taxes. And yes, that spot has been held for years and yet Hawaii continued to prosper. For some observers, that situation changed when the Asian economies began to falter. They argue that because Hawaii’s economy is so closely tied to the Asian economies, the state’s economy also stumbled and therefore the poor economic condition of the state.

That latter observation is a bit difficult to swallow if we remember that Hawaii is one of the fifty states of a Union where the national economy of that Union is roaring red hot; where the talk is what will the market do tomorrow, where the description is “the longest period of prosperity during a peacetime economy.” In fact many ask what happened to Hawaii when the other forty-nine states are headed in the opposite direction?

Let’s just be honest about what has happened in Hawaii. Statehood and the jet age brought unparalleled interest by those on the outside who saw an opportunity to invest and grow in Hawaii. Investors beat a path to Hawaii’s door, believing they could make a buck in Hawaii. And the visitor industry provided that opportunity. However, at the same time, government took advantage of that growth and grew itself, providing first the necessary infrastructure to satisfy the new demands and then adding even more on top of that demand.

The demand for more and more revenue grew over the years. New taxes and later fees were imposed to squeeze more and more out of the taxpayer and more importantly out of the economy. But as long as investors came to Hawaii and things were good, no one paid attention. As long as businesses got contracts from government, no one said anything. After all, if you wanted to stay in business or if you wanted some of those sweet public contracts, one dared not rock the boat.

However, when investors found that after paying all those taxes, complying with all the regulations and permitting just to start businesses in Hawaii or to build a development, it just did not make economic sense to keep on throwing money down the drain by investing in Hawaii. And no, it was not just those investors from Japan, but locally grown businesses which found that they could not make a profit by staying in Hawaii.

Without all those taxpayers, the apple began to shrivel. And so those proposals for tax cuts came about where the politicians figured that one way they could show the world that Hawaii was once more friendly to businesses was to cut the burden of taxes. But the politicians were less willing to make the concurrent cuts in spending, for after all, many of their constituents were dependent on that cornucopia of public funds.

The result is what has been laid out before us in recent days, that the state is headed for red ink. But unlike what politicians would like us to believe, it is not only because taxes were cut, but more importantly because spending has not been cut. Let’s get that point right.

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