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Make Real Reductions, Not A Token $1

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By Lowell L. Kalapa

(Released on 01/07/07)

Under the state Constitution, the legislature must provide for a tax rebate or a tax credit this coming session as the state general fund experienced a surplus of more than 5% of general fund revenues during the past two consecutive years.

In the past when these surplus conditions occurred, the legislature tended to provide a token tax credit of $1 per exemption.  Only when the surplus was so embarrassingly large did lawmakers provide a three-figure tax credit.  The reasoning for this token amount was that the state had so many “unmet” needs that had been deferred from previous years.

Unfortunately, many of those “unmet” needs turned out to be special funds into which lawmakers tucked those surplus dollars in order to avoid having to return them either as a larger rebate or as major structural changes.  Only when the economy turned sour did lawmakers try to alleviate Hawaii’s high tax burden. Since surplus funds weren’t available in those depressed economic years, what changes were proposed had to be implemented over a period of four years.

Thus, both the administration and lawmakers have a unique opportunity this year to make substantive changes to Hawaii’s tax structure. These changes can run the gamut from a further reduction in income tax rates to an across-the-board reduction in the general excise tax rate. And if lawmakers just need a little direction, they can pick up a copy of the latest Tax Review Commission report.

By all means, lawmakers can attempt to atone for their missteps in imposing the half-percent county surcharge. Perhaps then taxpayers can forgive legislators of their sins. For those taxpayers who can recall, this was the very situation nearly 16 years ago when lawmakers last attempted to give the counties the option to raise the general excise tax rate for mass transit. For those readers who may not recall, or who were not here, the scenario was one of the state sitting on an opulent, if not gross, surplus in the general fund while telling the counties, “let them eat cake” by allowing them to raise the general excise tax rate.

If mass transit for Honolulu is so critical to the future of Hawaii’s capital city, if not the state, as some have noted, then why not use the existing surplus rather than raising taxes? If lawmakers don’t have the fortitude to make such an across-the-board cut in the general excise tax, they may want to consider a recommendation by the Tax Review Commission’s consultant to mitigate the pyramiding of the general excise tax. This would require either a reduction in the rate, or elimination of the tax on business-to-business transactions. It is this unique facet of the general excise tax that distinguishes it from the retail sales tax found on the mainland.

Because the general excise tax is imposed on purchases made by businesses for consumption by that business, the cost of the tax becomes part of the business’ overhead. This additional cost must be recovered in the shelf price of the goods and services sold by that business. Thus, government’s “take” is hidden in the cost of the goods and services we, as consumers purchase, for our own consumption. While the revenue impact of such an exemption probably would be modest on a relative basis to an across-the-board cut in the general excise tax rate, the overall impact of such an exemption could counteract the negative impact of the county surcharge.

Further, an exemption of business-to-business transactions would go much farther in stimulating the economy than any of the gimmicks or tax incentives that the legislature adopted in recent years. It would not only be a boon to a business, but also to its customers as the cost of goods and services would not be as adversely affected by the county surcharge hike. More importantly, it would not discriminate on the basis of the type of business being conducted as is the case with the high technology tax credit, film tax credit, digital media tax credit or the ethanol tax credit.

As the legislature embarks on its 60-day journey later this month, taxpayers need to hold these elected officials accountable for handling the looming surplus. A token $1 or even $100 rebate is totally unacceptable. Structural changes to Hawaii’s tax system that will reduce the heavy burden of taxes will insure the continued vitality and vibrancy of the state’s economy. Hopefully, both the administration and the state legislature will seize the opportunity to make these structural changes.

And you, as the taxpayer, play an important role by reminded these elected officials that they are spending your tax dollar. And don’t ever let them forget it! 

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