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Kettle About To Boil Over For State

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Kettle About To Boil Over For State

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

“Oh my goodness,” moaned a middle-aged matron about the state of the economy and her 401(k) as news of the slide in the stock market streamed across the television screen.

It was only a few short years ago that Hawaii experienced a slump in the local economy and elected officials struggled to find ways to “fix” the economy. In a moment of desperation and faced with a reelection bid, the governor convened a task force to search for ways to revitalize the ailing island economy.

Struggle as they did, the group of elected officials and representatives from business and labor recognized that government had imposed numerous burdens on the economy as a whole and especially on those doing business in Hawaii. What is ironic is that while the task force recommended a major reduction in income tax rates and a widening of the brackets, that recommendation was paired with an increase in the general excise tax rate to make up for the loss of revenues and to shift the burden from residents to visitors. The task force also wanted to reduce the pyramiding effect of the general excise tax and cut corporate taxes in half.

The other increase in taxes recommended by the task force was an increase in the transient accommodations tax or TAT by one percentage point. Industry bought into the proposal because it came with the promise to earmark the revenue from three percentage points of the TAT for visitor promotion, a long- standing issue with the visitor industry (which was done).

In addition to the tax proposals, there were other proposals to reform the regulatory heavy-handedness of state government. From one-stop permitting, to prohibition of workers’ compensation claims related to disciplinary action stress, to elimination of the state land use commission and mandatory time frames for all permits, licenses and approvals; these recommendations were aimed at improving Hawaii’s business climate.

In the area of government, recommendations called for greater efficiency in government by strengthening the delivery of government services by eliminating the duplication of services between the state and county. The task force also called for greater transparency in providing information about the actual costs of running government. Calls were also made for converting the accounting system from cash to accrual and to change the budget system to one based on output or outcomes. And while recognizing the importance of the state procurement code, the task force also realized that more flexibility was needed in the procurement code so that it didn’t impose a huge burden on both the contracting agency and the bidding vendor. The task force believed that this could be achieved while still maintaining accountability.

In the area of education, the task force set goals like requiring a second language in order to graduate to be achieved by the year 2004 and by the year 2000 to have all eighth graders be computer literate. The task force also wanted the school-to-work program to continue even when federal funding ended by seeking funding from the private sector.

While the legislature did implement some of the proposals, they fell short of making many of the changes or to the degree recommended by the task force. For example, the task force wanted the top individual income tax rate set at 7%. The top rate was reduced to 8.25%. Although the general excise tax rate was not increased across the board, the legislature, nevertheless, increased the tax rate 0.5% for Honolulu’s rail project. While the pyramiding effect of the general excise tax was addressed, corporate income tax rates have remained the same.

Other than those “big bang” changes, the legislature fell short of the mark in improving business climate. Some may argue that they have done wonders for businesses like adopting tax credits for hotel construction and residential renovation following 9/11, and tax credits for high technology research and start-ups, and for digital media productions, ethanol production and alternate energy devices. While the beneficiaries of those tax credits may praise lawmakers, the rest of the business community sits on the Capitol doorstep sucking its thumb.

As the current economic downturn worsens, we will all rue the missed opportunity of truly improving the business climate in Hawaii. The business community will regret being distracted by the sex appeal of tax credits instead of addressing the systemic problems of the business environment. Lawmakers will regret not making Hawaii a better place to live and do business as businesses close down and exacerbate the plummeting tax revenues. Is it too late for change? It’s never too late!

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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