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Letting the Pot Stew a Bit Longer on Tax Changes

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By Lowell L. Kalapa

One of many amendments to the state constitution that is being proposed would lengthen the time between which the Tax Review Commission would be convened to examine the structure of the state tax system.

Under the current provision which was submitted by the 1978 Constitutional Convention, the state Tax Review Commission is to convene every five years for the purpose of reviewing the state tax system and making recommendations to the legislature on how it can be improved.

There have been three Tax Review Commissions since the provision was adopted by voters back in 1978. While the reports produced by each of the Commissions vary widely, the quality and quantity of the reports made have much to do with the amount of resources that were available to each Commission. The 1985 and the 1995 Commissions undertook their respective tasks at a time when the state was hard pressed for financial resources. In fact, the first appointed Commission resigned en-masse when the legislature and administration refused to provide adequate funding.

As a result, the two Commissions were crippled in just how much they could accomplish. The 1989-90 Commission, on the other hand, was appointed at a time when the state was flush with cash. That Commission was given more than $300,000 to accomplish their task. As a result that Commission was able to contract with independent observers and experts from outside the state to help evaluate the system. Tomes of reports were ordered and the nation’s leading experts in a variety of taxes came to Hawaii to check out the tax system.

Although the recommendations made by the 1989-90 Tax Review Commission were not well received at the time – the then Budget & Finance director called the recommendations, “irresponsible” – they would serve state leaders well over the decade that followed. The less than enthusiastic reception was due in part to the plain fact that the commission recommended making reductions in the revenue-producing power of the state tax system.

Among these revenue reducing suggestions was a cut in the net income tax rates, a resolution of the pyramiding of the general excise tax on the purchase of services for resale and on the leasing and subleasing of real property. That Commission also recommended putting the export of services on the same footing with the exporting of goods, that the exported sales be exempt from the general excise tax.

That commission also recognized some inherent problems in the basic financing scheme of the state tax structure, that lawmakers used the excuse not to cut taxes because they feared not having enough money to cover the expenses of the state. This concern spawned the Commission’s recommendation that the state be allowed to set up a rainy day fund that would not only provide a cushion against bad times, but would also remove the excuse that tax rates should not be cut.

This was also the Commission that recommended that the state’s bank tax be overhauled to get financial institutions ready to compete in interstate banking. And while the local banks balked at the idea, the age-old argument that they had used for the past 50 years just did not work, that the bank tax was a complex tax that needed closer study. Yelling, kicking and screaming the bank tax was finally reformed and none too soon as local institutions were soon put in direct competition with financial institutions from across the nation.

Finally, that Commission recommended doing away with the many inequitable preferences that had been conferred on certain taxpayers over the years. This wholesale clean up of especially the general excise tax cleared the way for a much fairer tax system. Indeed many of the recommendations made by the 1989-1990 Commission were adopted by the Economic Revitalization Task Force convened by the governor a few years ago.

The amendment that will be on voters’ ballot this November will ask that the period between which Commissions are to be convened be lengthened from five years to ten years. The argument is that it takes that long for lawmakers to fully understand the recommendations made by the Tax Review Commission.

Based on the past track record, allowing ten years to elapse before convening a new Commission is appropriate, but what is more important is that future legislatures should recognize the importance of properly funding the Commission.

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