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Staying The Course To Economic Stability

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By Lowell L. Kalapa

It was certainly disappointing to see that, despite promises to resist tax increases, the measure raising the conveyance tax was signed into law with little or no acknowledgment of the fact that the increase will, in fact, raise the cost of affordable housing in Hawaii as well as the overall cost of living.

Perhaps it is the exuberant economy that has blinded state leaders to the fact that Hawaii continues to be a fragile economy subject to the whims and wishes of the global marketplace. How soon lawmakers and government officials seem to forget the difficult economic days of the past decade when community leaders searched for ways to “kickstart” and “jumpstart” the economy. Do lawmakers remember how they wished they could have enacted bigger reductions in state income taxes but couldn’t because there was no money to be had and that, in fact, they had to phase-in income tax reductions over four years?

Instead of making further reductions in either the state net income tax or, for that matter, the gross income tax, elected officials resorted to gimmicks like tax credits figuring that there would be no loss of revenue if, in fact, the credits did not achieve the desired results. Little did lawmakers realize that some sharp entrepreneurs could take advantage of the credits without creating the permanent jobs and economic activity that were intended.

On the other side, instead of working toward reducing the impact of the general excise tax on Hawaii’s economy, lawmakers entertained the proposal to raise the general excise tax rate this year in order to fund transit for Honolulu. Sure, legislation was adopted just before the turn of the Century to reduce the pyramiding of the tax as it related to the purchase of services for resale, but the general excise tax continues to be the most regressive tax that Hawaii imposes. And based on state-by-state comparisons, the little old 4% tax generates a heck of a lot more bucks for the bang than a comparable sales tax of 4%.

In fact, when Hawaii’s per capita take from the 4% rate is compared with other states which have a 4% sales tax rate, our island state outdistances any of those other states. The states that impose a 4% sales tax rate generate the following per capita amounts: Alabama ($421), Georgia ($546), Louisiana ($618), South Dakota ($632), and Wyoming ($848). Hawaii checks in with a whopping $1,358 per capita in collections from the state’s general excise tax.

And while some observers like to point out that some of that burden is paid by Hawaii’s visitors, according to an earlier Tax Review Commission study, visitors to Hawaii pay just under 22% of the total general excise tax collections. That being the case, then the per capita amount for residents still clocks in at more than $1,000 per resident. Deceptive as it is, the 4% general excise tax takes a big chunk out of our income as residents.

The fact that the general excise tax is a transaction tax means that it is far more regressive, taking a bigger percentage of a low-income family’s budget than the percentage taken from a higher income family’s budget. So it hurts the poor far more than it hurts middle and upper-income families.

So the point of the matter is that now that the state is enjoying a period of economic exuberance it is the right time to take steps to improve our tax and economic climate. Instead of waiting for another downward drop in the economy, elected officials need to take the bold step to reduce the tax burden and slash through the hidden tax called regulation. Don’t wait until there are no resources to enact tax cuts that will help not only to improve the business climate, making it more attractive to do business in Hawaii, but also to improve the lot of families across the state who are struggling to put food on the table.

The opportunity is now and hopefully elected officials will forgo their own political gain to make improvements for the future of Hawaii. We know what it was like during the doldrums of the 1990’s. Let’s make sure that we set the future of the State on the right economic course. Policymakers should not be blinded by the happy days of the here and now.

Indeed, now is the time to fix the economic infrastructure, reduce the onerous tax burden for which Hawaii is well-known and to streamline the regulatory obstacle course that we know already exists in state and county government. The state and counties have the resources to make these systemic changes, the question is will lawmakers and administration officials have the will to undertake this task or will it be business as usual?

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