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Tax Tumor Growth Can Damage Economic Outlook

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By Lowell L. Kalapa
(Released on 08/12/07)

One of the major reasons why it is so costly to live in Hawaii is the burden that government places on the state’s economy, making it difficult to survive in a very high cost environment.

As noted in last week’s column, the most insidious tax burden Hawaii residents and businesses must bear is the cost of the general excise tax. Its deceptively low rate of 4% (4.5% in Honolulu) belies the impact that it has on all aspects of life here in Hawaii. But the general excise tax is not alone in imposing a heavier burden on Hawaii’s residents; there is a plethora of other taxes beginning with the net income tax.

National tax comparisons consistently rank Hawaii as one of the states with the lowest threshold where it begins to impose the net income tax, meaning that people who would otherwise be considered poor or low-income are paying the state’s net income tax. At the other end, Hawaii is among the top six states with the highest maximum net income tax rate.

And while Hawaii’s property tax burden pales by comparison to those found on the mainland, the high assessed valuation of property in Hawaii becomes a tempting target for council officials who then must set the rate. In many cases, the elected officials don’t take the political heat, blaming high tax bills on the assessed values caused by “speculators” on Hawaii properties.

Another burden imposed by government in Hawaii which adds to the high cost of living is government regulation. A reader bemoaned the fact that there is no such thing as affordable housing in Hawaii. Well, a good reason for that is government regulation. Beginning with the unwillingness to upzone agricultural land as epitomized by the constitutional provision to preserve “important agricultural land,” to the maze of permits and inspections necessary to develop housing, government is at the center of the problem. One developer noted that it took as long as five years to get all the necessary permits to build a small development of 17 homes.

Then there are the inspections. For example, if one opens a child care facility, one better know in which order the inspectors must come. Is it the electrical inspector before the fire inspector or is it the building inspector before the fire inspector? If they come to inspect in the wrong order, the owner of the facility is back to square one. As one new restaurant discovered, they had to get the “certificate of occupancy” before they could open their doors. Unfortunately, they opened their doors for business only to be shuttered when it was discovered that they didn’t have that certificate.

While many of these permits and inspections are for the health and safety of the public, one has to question why government can’t better coordinate and process the permits. It seems that government doesn’t recognize the value of time, and the old adage that “time is money” is certainly a truism. As a result, the slowness with which government moves adds to the cost of living and doing business in Hawaii.

A few years ago as a way to make a few extra bucks at the time and to supposedly speed up the permitting and documentation process, lawmakers allowed some departments to charge extra if one wanted to fast track their application. Hey, it sounded like a great idea, but what lawmakers failed to realize is that this expedited processing came at the expense of all other applicants who could not or would not pay the extra charge to expedite their applications.

Add this to the phalanx of fees that state and county government added in the mid-1990’s when the economy turned south and the burden becomes even heavier. It didn’t help when lawmakers played fast and loose with finances, creating special funds and stealing from dedicated or special funds to supplement the general fund when the general fund lacked sufficient resources.

And, of course, more recently, our lawmakers levied yet another “tax” by imposing a new fee on all shipping containers, guaranteeing that the cost of all goods we both consume and export will be more expensive.

As the burden gets heavier and heavier, people will once more consider moving out of state and businesses will rethink the viability of remaining in the state. What will happen is that only those businesses that can achieve economies of scale and are therefore able to compete for continued patronage will survive. As residents and businesses move out of the state, the outlook for the economy will once more head south.

The time is now for public policymakers to address this growing tumor that government represents on the economic outlook. Let’s hope they won’t wait until it is again too late.

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