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Will We Realize Heavy Tax Burden Stifles Economic Growth?

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By Lowell L. Kalapa

Last week we learned from a panel of experts that imposing sales taxes on business purchases or inputs detracts from an attractive business climate or environment.

Because businesses have to recover all costs if they are to remain in business, they have no choice but to pass on the added cost of sales taxes imposed on their purchases in the price they charge for their goods and services. As a result, as the panel of experts pointed out, businesses reduce their activities in that jurisdiction or relocate to another state so that they can remain price competitive. The long and short of this latter scenario is that there are no new job opportunities for the residents of that state.

Although it may sound like a broken record, taxpayers need to acknowledge that Hawaii is in the top ten percent of the fifty states when it comes to per capita state and local tax burden. There are a variety of reasons for our “head of the class” rankings.

While income tax rates were reduced in 1998 largely in reaction to the economic doldrums that Hawaii had experience, but also certainly in part for the quest to gain reelection, Hawaii’s tax rates remain amongst the highest in the nation and the maximum tax rate kicks in at relatively low-income levels. And at the bottom, Hawaii has the third lowest income level before it begins to impose the personal income tax.

And as we learned last week, Hawaii’s general excise tax can be harsh and cruel to businesses struggling to survive. Because it is a tax on gross income received by the business, it takes its due without regard to the profitability of the business. It is due even if the business is going out of business and is selling its goods and services for less than what the business paid for those products or services.

Further, because the general excise tax is imposed on all transactions including those which involve the purchase by a business of products and services that won’t be resold, the cost of the tax has to be recovered by the business passing the added cost of the tax on to his or her customers. And it is this added cost that puts Hawaii businesses at a competitive disadvantage on the national and international marketplace.

But cutting taxes has not been a popular moniker of our state legislators. In fact, it was only when the last administration was staring down the double barrel of an economic shotgun did it acquiesce to reducing income tax rates, and then only with the notion of possibly having to raise the general excise tax rate. Lawmakers who were also up for reelection that year bought into the income tax rate cuts but couldn’t swallow the increase in the general excise tax rate. And in the end, the increase in the general excise tax rate was unnecessary.

Since that time, lawmakers have tended to “spend” tax dollars by doling out tax credits to specific industries while avoiding wholesale across-the-board tax reductions. These targeted tax credits have been the target of a great deal of criticism because they favor only certain taxpayers and the lack of transparency makes many leery of just how much and to whom these tax benefits are flowing. Indeed, because taxes have not been reduced for all other taxpayers, the impact is that those not so favored end up picking up the tab for those who can reap the windfall of tax credits.

Another block of opposition comes from the public employee unions who expect the trough to remain full and therefore don’t want to see tax revenues ebb. In fact, in recent years whenever a proposal for a major reduction in tax rates or an increase in an exemption is proposed, testimony pops up in opposition from the public employee unions.

It is unfortunate because those reductions will benefit all taxpayers including the rank and file of public employees be they income tax reductions or reductions in taxes businesses pay. Until this mind set that tax reductions will mean less money in the public coffers changes, Hawaii’s economy will be subject to wide swings depending on how much bacon our Congressional delegation can deliver and the fickleness of the visitor industry which is well beyond the control of state leaders.

If Hawaii is to build a solid economic foundation for the future, community leaders in business, labor and government must begin to shape an attractive business climate and it starts with the bottom line of taxes.

Politicians can talk all they want about quality of life issues, but if individual families and businesses cannot afford to remain in Hawaii, then there is no quality of life because there will be no jobs in the future, there will be no vibrant growth in economic activity, and few will be able to afford the cost of surviving in Hawaii.

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