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Answer to Shortfall is Not Raising More Taxes

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By Lowell L. Kalapa

Lawmakers never seem to amaze taxpayers with their ideas of how to address the projected shortfall of revenues as a result of the down turn in the state’s economy.
According to the latest revision of the projections for state tax collections for the next two years, the state’s coffers will be shy about $150 million for the current and next fiscal year. As a result, administration officials and lawmakers will either have to make severe cuts to the state’s spending plans or as some lawmakers have suggested, come up with ways to raise the case for new taxes and fees.
The Speaker of the state House and former chair of the House Finance Committee has again raised the suggestion that perhaps the general excise tax should be imposed on the revenues of all nonprofits. A variation might also include imposing the general excise tax on transactions currently exempt from the tax albeit at a rate less than 4%.
Both of these ideas have been raised in the past and both have been discarded for the lack of good rationale. For example, while it is estimated that the health and human services nonprofit sector represents about $1.6 billion in gross income or about 4% of the total state gross product, imposing the general excise tax would generate only about $64 million in new revenue at a 4% rate or about $32 million at a 2% rate. However, the cost of the services provided by the health and human services community would rise.
Many of these nonprofit agencies have contracts with the federal, state and county governments. If those agencies would have to pay the general excise tax, be it at the 4% rate or a lesser rate, would the federal, state or county governments increase the amount they are willing to pay for those services? And if not, will those agencies go out of business because they can’t afford to pay the extra amount? Who then will provide those services?
If the tax is applied to nonprofits as it is applied to businesses where every single cent of gross income is subject to the general excise tax, will that mean that churches have to pay the tax on the donations in the Sunday collection plate or will organizations have to pay the tax on any contribution they receive? If that is the case, will donors be asked to give a little more so the agency can pay state government the tax? Such a proposal flies in the very face of the underlying philosophy of the general excise tax which as the law states is imposed for the “privilege of doing business in the state.” “Doing business in the state” implies that one is doing something to make a living by earning a profit. The very idea of taxing a nonprofit which is established not to produce profits but to provide badly needed services flies in the face of the “privilege” tax imposed by the general excise tax.
Many of the exemptions created under the general excise tax law recognize that the tax imposes an extraordinary burden on certain types of activities or in some cases those transactions are exempt by a superior law, usually the federal law. An example of a case of the former is an exemption that recognizes that certain income received is actually a pass-through such as the case where a hotel management company manages the staff of a hotel but receives the income that is paid out in wages and benefits to the employees of the hotel. To impose the tax on that income in addition to the tax imposed on the gross income of the hotel would amount to double taxation and a reduction of resources that would otherwise be available the employees.
In the case of transactions which are exempt by superior law, it should be remembered that purchases of goods with food stamps or WIC coupons are exempt by federal law. Thus, the state could not impose the general excise tax on those transactions as it would be in violation of the federal prohibition.
Instead of just trying to raise additional funds to fund the state spending plan, lawmakers and administration officials should try the novel approach of figuring out more efficient ways to provide the same level of public services for less dollars. No, that doesn’t mean cutting wages and salaries, but it does mean finding ways that the same more public services can be provided at a lower unit cost. Such saving could be realized thought high technology or simply rearranging the way the state does business.
Revenue shortfalls should not result in raising taxes or merely cutting programs. Instead, such shortfalls should be viewed as an opportunity to reform the way government does business.

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