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So, It Will Be Just Another Half Cent?

posted in: Weekly Commentary | 0
By Lowell L. Kalapa

One reader questions why there shouldn’t be a “rush” on the transit tax. He suggested that we sit in the traffic out in Kapolei to better understand the need for the “rush.”

Obviously, that reader missed the point that the “rush” being questioned was the “rush” to impose the general excise tax rate increase. That “rush” is in contrast to the lack of “rush” to begin planning, or at least exploring, what the transit alternative will look like and the possibility that if any decent planning is to be done, that it will probably take us beyond the date by which the tax must be imposed.

By that time, it will be too late to back up, undo, or take off the tax because the process will be down the path of no return. It is only at that point, when the planning and the required environmental and financial impact statements have been submitted and approved that the public will have an idea of just how much this transit alternative will cost. At that point, policymakers and planners will have to decide whether or not the half percent tax rate will be enough to cover the costs of building and operating the system.

Both critics and opponents have characterized the 0.5% increase in the rate to benefit their own ends. In the case of the proponents, “It’s just another half cent.” For the opponents, the increased rate is characterized as a 12.5% increase, the 0.5% being one-eighth of the 4% rate. Both are right and wrong depending on what they are trying to describe. What is more important is how much the additional rate will raise in overall funds as that is what will be needed to pay for the proposed system.

Honolulu’s mayor noted that this increase in the general excise tax rate is not the biggest tax increase in the history of the state but that “distinction belongs to the 1963 [sic] increase, which raised the GET from 3 percent [sic] to 4 percent.” First of all, the mayor is wrong on two important points. The last time the general excise tax rate was increased was in 1965 and rate was upped from 3.5% to the current 4%.

At that time many bought into the increase because Governor Burns had presented a plan to upgrade Hawaii’s public infrastructure to meet the developing visitor industry and the rapidly growing population. The “New Hawaii” program had the buy-in of many sectors for it showed promise for economic growth and people understood that the monies were needed to grow the new state’s economy.

That is not the case with the transit plan which has yet to make an appearance on the blackboards or on the desks of policymakers. Without the price tag, taxpayers won’t know if the 0.5% rate will be enough or too much money – which in the latter case is money forgone from taxpayer/consumers and businesses that might otherwise have strengthened and expanded the economy.

Wait! How could the 0.5% rate generate too much money? Indeed lawmakers have pegged the amount to generate initially $150 million per year.

The $150 million is derived by taking 70% of the current collections of the general excise tax at a rate of 4% since about three-fourths of the population resides on Oahu which is expected to be the only county that levies the additional rate, and then taking one-eight of that amount which represents one-half of one-percent, give or take a little. Thus, one could argue that it is a 12.5% increase because the estimate is being taken off of the current collections number and therefore the current base.

That would not be true with the increased tax rate because the amount of the tax required to meet the obligation of the increased rate will be added to the base once the higher rate is imposed. A bigger base means that tax collections will grow faster than the static estimate.

All taxpayers have to do is to look at the experience the last time the tax rate was increased. The 1965 rate increase represented an approximately 14% increase in the rate, but lawmakers gave the increase the benefit of the doubt and referred to a possible 17% increase in collections. The reality is that general excise tax collections grew by more than 73% in 1966, the first year of the rate increase, then by 11.5% the following year and by 9.6% the next year. Sure some of the growth was due to economic growth, but much of the growth in that first year has to be an adjustment in the tax base as represented by the shelf price of all goods and services sold in Hawaii.

And guess what? Not only will taxpayers be paying a higher tax rate, but they will also be paying more for the goods and services they purchase.

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