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Zany Lawmakers Need Lesson In Good Tax Policy

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By Lowell L. Kalapa

(Released on 1/27/08)

With a resounding pounding of the gavel, state lawmakers are off and running for another session of legislative mischief or as we have heard in the past, when the legislature is in session hold on to your wallets.

Not only will lawmakers attempt to find new ways to get their hands on your wallet, but they will also attempt to “stimulate” a weakening economy by adopting all sorts of gimmicks to encourage this or that type of activity, or “take care” of some poor taxpayer that will usually come at the expense of other taxpayers. To be sure, we will see a spate of proposals calling for tax credits because lawmakers believe tax credits are the magic bullet to cure anything.

What lawmakers seem to overlook is that is an expenditure of public funds out the back door and unless they are willing to give up spending on some public program or project, the funds they want to spend out the front door have to come from all other taxpayers. Further, those tax expenditures lack accountability, as lawmakers never know whether or not they will achieve their intended goals or how much will be claimed.

Lawmakers should listen to their own professional association, the National Conference of State Legislatures (NCSL): A high quality revenue system minimizes its involvement in spending decisions and makes any such involvement explicit. The primary purpose of a revenue system is to raise money. One of the goals of a revenue system is to be economically neutral (Principle 3), a goal that is inconsistent with the use of tax policy to make budget decisions or influence behavior. Revenue systems can affect budgets in two main ways – through deductions, exemptions and credits intended to foster certain activities and through the use of earmarking. A high-quality system may include such devices. But policymakers should be certain that these measures not only would do what is expected of them, but also reach their goal at a reasonable cost. Tax deductions, credits and exemptions shift tax burdens from a favored set of taxpayers to less favored taxpayers. For this reason, the costs should be explicit and should be reviewed annually.

On the other hand, hopefully lawmakers will recognize that one of the beauties of the general excise tax, which provides nearly half of the general fund tax revenues, is that it has such a broad base so the general excise tax rate can be deceptively low. No wonder visitors from other states that impose a sales tax are amazed that we don’t have a “sales tax” rate as high as the one with which they have to contend with in their home state. Well and that’s true except, the general excise tax is imposed on all transactions, especially services which usually are not subject to the retail sales tax in other states.

But there is no doubt that lawmakers will want to hand out some sort of tax break. Hopefully they won’t repeat some of their ignorance of the general excise tax law, like exempting the counties from the tax. Remember guys, the general excise tax is on the business selling goods and services to the counties even though it may seem like the counties are paying the tax because the businesses show the tax out separately as a charge. Exempting the counties as some lawmakers have proposed in the past does nothing as the counties are not making the sales.

And if they try to exempt businesses that sell goods and services to the counties, they will be giving a huge advantage to those businesses that deal with the counties at the expense of those businesses that sell similar goods and services but don’t have the county as a customer.

Lawmakers should remember that the tax system is there to raise money to pay for services that their constituents want and need. It does not exist to cause taxpayers to act in strange ways. Using the tax system to engineer social and economic behavior is just plain stupid. Lawmakers should not force the tax system to do anything else other than to raise the money to operate state government. It is just poor tax policy.

Offering incentives to solve social problems is just as bad as trying to create new jobs with some fandangled political gimmick. Taxpayers should recognize the slight of hand when they see that lawmakers are adopting some sort of tax break that will cure the social ills of the world or create a ton of new jobs. Conversely, if you hear lawmakers about to impose a new tax or a higher tax rate to punish some evil people, like speculators in Hawaii real estate, be ready to have it come back to bite you! The next few months should prove that lawmakers couldn’t recognize good tax policy if they saw it.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.

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