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Budding Signs of Economic Turn Shouldn’t Deter Right-Sizing

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By Lowell L. Kalapa

Notice how business and government leaders are cautiously jubilant about economic indicators that they claim show a turn-around in the economic outlook for the state?

While it is understandable that business leaders await an upturn in the economy with great anticipation, one has to be a bit more cynical about the reasons government leaders anticipate an upswing the economic outlook. True, an economic upswing would spell less unemployment, less demands for welfare and support programs, and perhaps most important of all to elected officials, an increase in state tax revenues.

An upswing in tax revenues would be the most anticipated outcome of an economic turnaround for elected officials as it would mean that they would once more have lots of tax dollars to splurge on this or that public program – or so they think. Actually, an economic upturn may not produce the quantity of dollars that the old tax system produced in the late 1980’s and the early part of this decade.

With the reductions made in income tax rates two years ago and the phase-in of the pyramiding correction of the general excise tax, changes in the economy will not produce the same magnitude of growth as the old system did. Thus, while elected officials watch the economic pulse with great anxiety, they should exercise a bit of prudence and restraint in refraining from anticipating a return to the free-wheeling spending of the late 1980’s.

Taxpayers have every reason to be concerned that elected officials will ignore this fact. There are already efforts afoot to avoid correcting the excesses of the past. What all taxpayers have come to acknowledge is that the financial windfalls of the late 1980’s allowed elected officials and public bureaucrats to expand government services, hire more public employees and provide more benefits paid by tax dollars. Now that the economy is not wallowing in the excesses of the Japanese bubble and the insatiable appetite of the visitor, the tax system has not been able to keep up the payments on the limousine we call state government.

If a turn around in the economy does in fact produce more revenues than anticipated, there is no doubt that the temptation will be there to spend those added dollars on either keeping the size of government at the same overloaded level that was created by the largesse of the “good years” of the early 1990’s or finding new ways to spend those dollars. This would be the biggest mistake elected officials could make in an economic recovery, for not only would it perpetuate the problems that got the state into trouble, but it will impede whatever recovery Hawaii can anticipate in the near future.

What elected officials and taxpayers should remember is that much of the “reductions in government” that have been touted in recent years have not occurred as a result of actually eliminating positions or programs. Instead, the so-called “reductions” have been achieved by moving what use to be programs and positions funded by general fund tax dollars – like those realized from the net income tax and the general excise tax – to special fund sources usually underwritten by user fees and charges. As a result, elected officials can claim that they “have reduced” state spending. So while the amount of government spending – at least from the general fund and the taxes that make up the general fund – appears to have been curtailed, it merely shows up in another category and the people and programs are still there.

Thus, instead of right-sizing government, elected officials will exacerbate the situation by not only having the same size of government because many programs are now funded with user fees and charges, but new programs will be created because elected officials believe the state has new resources to spend.

Instead of being misled into believing that just because there is an upturn in the economy and a potential turnaround in the state revenue picture which will allow continued or increased spending, taxpayers should demand that elected officials take this opportunity rein in the size of government to pre- boom days of the 1980’s. Hopefully elected officials learned a lesson with the current economic slump – that Hawaii’s economic engine cannot support an unreasonable and burgeoning government bureaucracy.

With or without a turn around in the state’s economic picture, elected officials need to keep on the steady course to bring the size of government back into line with what its taxpayers and the state’s economy can bear without going under.

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