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Zesty Economy May Turn Sour Before Year End

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By Lowell L. Kalapa

(Released on 1/20/08)

Hawaii has enjoyed a run of good economic times as visitors flocked to our shores instead of going overseas in the post 9/11 era. As a result, the tax revenues have rolled in with each succeeding year topping the previous year’s growth.

However, as a result of a number of events, both locally and nationally, these ebullient times may well be over beginning later this year. Of course, nationally the credit crunch caused by the subprime lending practices of the past few years foretells some hard times ahead as homeowners try to grapple with rising interest rates against their adjustable rate mortgages. And while the portion represented by the subprime market compared to the over all mortgage market is relatively small, the domino effect it will have on the housing market and its related industries will be substantial.

With a diminished demand for housing on the mainland as a result of both those trying to hold on to their houses while others await the fall out of the credit situation hoping to cash in on foreclosures or fire sales of homes, there will an increase in unemployment in those industries that support the housing market such as construction and home improvement businesses. The unemployment rate is already beginning to rise on the mainland and production is beginning to slow. So it is no wonder that the retailers saw very little growth this past holiday season in the wake of weakening consumer confidence.

Thus, there is good reason to believe that with consumers leery of spending what discretionary income they have, that the visitor industry is likely to see a slowing in growth. And being Hawaii’s largest industry and employer, there is no doubt this will have a substantial impact on the outlook for that industry. The same can be said about the eastbound traffic that already has been falling off as visitors from Japan search for new destinations that are not quite as pricey a destination as Hawaii.

And while not as a severe fall off as its mainland counterparts, Hawaii’s construction industry is destined to feel some of the effects of the credit crunch. This is already evidenced by fewer and fewer building permits being requested for new commercial or residential developments. And while the massive redevelopment of military housing has some time to run, what resources are needed have already been engaged. Thus, the outlook for construction is less than encouraging.

The third leg of the state’s economic stool is federal spending. While our Congressional delegation has been hard working breadwinners, there is only so much federal money to go around. Hawaii has always been a net importer of federal dollars, bringing in more than its residents pay to the federal government. But with rising deficits at the federal level, one has to be somewhat skeptical about the possible increase in pork flowing from the Potomac across the Pacific.

Thus, with a slowdown in the economy, tax revenues will certainly not materialize at the same pace that they have in the past few years. What is even more troubling is that the potential loss of revenues as a result of the several targeted business tax credits will drain even more resources of the state putting lawmakers back in the same place they were nearly a decade ago. At last count the high technology tax credit stood at an annual loss of nearly $80 million and the cost is expected to rise as more and more investors claim additional credits.

What this all means is that taxpayers will become the target of lawmakers to cover the soon to be widening gap between revenues and expenditures. Although more rational heads would suggest that the state tighten its fiscal belt, we all know, based on experience, that belt tightening is something elected officials don’t seem to know how to do. Thus, it becomes inevitable that lawmakers will find even more ways to shore up the revenue side of the ledger by asking taxpayers to pony up more dough for them to spend.

While it doesn’t have to be so, unless taxpayers voice their disdain for even higher taxes and fees, lawmakers will follow this game plan as they try to satisfy what they perceive as their constituent demands. The problem is that they seem to ignore the plight of the taxpayers always relegating the taxpayer to the back seat or figuring they can squeeze even more out of the non-voting taxpayers called businesses and tourists.

In the end, as we have learned so well, businesses and things don’t pay taxes, only people pay taxes.

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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