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Sustaining Government Services Depends on Base Expansion

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By Lowell L. Kalapa

The issues are the same at both the state and county levels when it comes to financing government services – having enough dollars to pay for all of the services seemingly demanded by taxpayers and voters.
Unfortunately, elected officials both in the administrative branch of government as well as in the policy making legislative branch of government have yet to understand what makes or generates those tax dollars they love to spend. In the eye of the elected official, to raise more money one merely has to raise tax rates.
And while logically that would seem to be the case, larger tax rate times the base should equal more money, that may not always be the case. As experience relates, a higher tax rate can sometimes cause people to act differently, so much so that a higher tax rate might just produce less revenues.
Take for example the hike in the cigarette tax rate from 60 cents a pack few years ago to 80 cents and then to one dollar per pack. Some people gave up smoking because the price got too unreasonable while others found ways to purchase their cigarettes from sources where the tax was not imposed – from military installations or from the mainland via mail order or Internet. The result was that cigarette tax revenues materialized at nearly two-thirds of what had been forecasted.
Too often elected officials forget that the second half to the revenue raising formula is the base. Taxes collected is the product of the tax rate multiplied by the tax base. The larger the base, the lower the tax rate has to be to generate the same amount of money that a narrow tax base would require. The obvious example is the state’s general excise tax. Unlike the sales tax structures found on the mainland, the Hawaii general excise tax base is all encompassing. It includes not only goods, but services. It taxes not only retail transactions but wholesale transactions, that is, it taxes not only purchases for final consumption but purchases for resale.
By comparison, the sales tax structure found on the mainland usually only taxes goods or things. More often than not, services are almost never taxed under the retail sales tax. So while a plumber making a house call in Kahala or Kihei would have to pay the 4% general excise tax, the comparable plumber in West Hollywood would pay no sales tax. Similarly, a farmer in Kamuela selling produce to a wholesaler in Honolulu would have to pay a 0.5% general excise tax on his sale while the farmer in the Central Valley of California selling his lettuce to Safeway in Fresno would pay no sales tax.
Ah, but the difference does begin to show at the retail level. The Hawaii general excise tax rate has remained at 4% since 1965. The sales tax rate in California or Washington has gone up so many times that it now approaches the 9% mark.
So a bigger base does help to hold down the tax rate. This is true for the real property tax. With more value in the real property of the county tax base, mayors can propose and county councils can adopt lower tax rates. The less value or the narrower the tax base, the tax rate has to be substantially higher to generate the same amount of revenue. And indeed county officials have over the years done a lot to shoot themselves in the foot by either narrowing the tax base or preventing the expansion of the tax base.
How you might ask???? Well, wanting to be good friends with their constituents so that they will be re- elected to office, county officials have increased exemptions or added new exemptions for whatever worthy purpose. The result, is that there is less value in the base. This means if county programs are not reduced or eliminated on a commensurate basis, tax rates on all other properties have to go up with higher rates.
The other way county officials have kept the base from broadening or adding more value is by standing in the way of the improvement or development of new properties that would then increase in value and add value to the tax base. Stopping the permits for new construction or upgrading of zoning prevents land owners from improving the value of the land or their improvements.
While residents certainly don’t want uncontrolled development of our island home, one has to keep in mind that if we want elected officials to keep tax rates low, the tax base has to be increased. Be it the development of land so the property tax base increases or the encouragement of new investment that will create jobs so that income tax rates will not have to be increased, a good part of insuring growing tax revenues is to insure strong economic activity.

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