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Incredible Record for Tax Review Commission

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By Lowell L. Kalapa

One of the measures that passed this legislative session that will be submitted to voters this fall is an amendment to the state constitution that will change the interval between which tax review commissions are called from every five years to every ten years.

The rationale behind this change is that it usually takes the legislature several years to understand and digest the changes recommended by the tax review commission. Indeed, the 1990 tax review commission made many far reaching recommendations to improve the tax system. So complex where these changes that even the then budget director called the recommendations “irresponsible” because he could not comprehend the impact that the changes would have on Hawaii’s economy.

But a “day late and a dollar short,” many of the recommendations made have been enacted into law during the decade following the first release of those recommendations. Ironically, many of those recommendations were adopted out of desperation by an administration that realized that it had to do something to improve the economy.

Let’s take a look at the impressive list of changes recommended by the 1990 tax review commission which now have become law. The foremost change is the lowering of the net income tax rates for individual taxpayers. On the other hand, many believe that the legislature did not go far enough in reducing rates and brackets as had been recommended by the commission. Lawmakers also have not acted on increasing the standard deduction or a consolidation of the income tax credits for food and extraordinary medical costs.

In the area of the general excise tax, the foremost accomplishment is the reduction of the pyramiding of the tax on services sold from one business to another. The other major accomplishment in this area is the adoption of a solution to the pyramiding of the general excise tax on leasing and subleasing of real property. Both of these recommendations will go a long way to help reduce the impact of the tax on the cost of living in Hawaii.

The other significant change in the general excise tax area is the exemption of services exported or sold to clients outside the state from the general excise tax and the corollary of imposing the use tax on services imported into the state. The exported services exemption should put Hawaii service providers on a more competitive footing with their competitors on the world market. Similarly, those who provide services in the state similar to those who provide the same services outside the state would not be at a disadvantage because of the 4% tax.

One of the earliest successes of the tax review commission’s recommendations was the elimination of blanket exemptions that carved out large classes of taxpayers regardless of whether or not they performed similar services or provided similar products in direct competition with those who were subject to the general excise tax. One of these was the financial institutions and certain nonprofit activities which realized gross income from activities for which others were subject to the general excise tax. An overhaul of the financial institutions tax, though initially vehemently opposed, positioned Hawaii’s financial institutions to better compete on the world market.

At the county level, the counties got a little more help with the sharing of the transient accommodations tax; however, the issue of sharing the proceeds of the public service tax continues to haunt the public utilities and the counties, an issue that begs resolution.

While there is still work to be done on other tax review commission recommendations, a good start has been made to reform the state tax system.

What is unfortunate is that there was such resistance when the recommendations were first submitted largely because adoption meant an initial reduction in revenues. What lawmakers and taxpayers have discovered of the hard lessons earned is that reducing the tax burden on the economy can be beneficial for the economy and for taxpayers across the board.

What is even more worthy of note is that many of these reforms that called for a reduction in tax rates and revenues were accomplished without having to concurrently raise other tax rates like the general excise tax.

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