Looking a Tax Increase in the Face

As lawmakers convene later this month, they will be faced with the fact that there won’t be enough money to carry on the state’s business as usual. In fact, before the departments were ordered to trim their budget, there was the possibility of being more than $1.2 billion short over the course of the ensuing biennium.

As the economy slips deeper into recession there is no doubt that the shortfall will grow even larger as tax revenues continue to fall in the wake of shrinking visitor counts, silence on construction sites, and layoffs in a variety of industries are announced. There is general agreement from the White House to Wall Street that the worst is still to come. So with the handwriting on the wall, lawmakers can expect the budget hole to grow even larger.

However, based on their prior track record, lawmakers hate to give up spending on this or that favorite program. The administration has already cut programs by 20% and while lawmakers may differ on the reductions recommended by the administration, the revenue picture will be so weak they will have to cut even deeper. At that point lawmakers certainly need to set priorities for the state’s spending plans for the next two years. As they review each program, questions must be asked as to how critical that program is to the health and safety of the community. They will need to put aside their provincialism of taking care of their back yard and take into account the much larger picture.

For example, while the lawmakers that represent a district where there is a school with dwindling enrollment may want to defend keeping that school open because it represents people who vote for him or her, they should weigh that school closing against the possibility that there may not be enough money for textbooks in all classrooms across the state; or not closing that school could mean the elimination of a program that helps to prevent child abuse.

Sure constituents like to preserve the status quo because they have become accustomed to the state government’s largesse. But guess what folks, the state doesn’t have any money, that is unless some lawmaker does the responsible thing by proposing an increase in taxes in light of the legislature’s inability to cut spending.

What you say? Raise taxes! That is just pure heresy in the lexicon of lawmakers. What would their constituents say if they, as elected officials, propose raising taxes? Their opponents in the next election would rub that fact in their faces. And, it will probably have to be taxes rather than fees as lawmakers have basically run out of new fees to impose or else they have earmarked fees for specific purposes and they can’t really touch those earmarked fees without setting off a firestorm.

But this is probably just what needs to happen in order to make constituents understand that you can’t spend money that you don’t have and if they want to spend that money then they need to swallow the political lump of coal and suggest raising taxes. The point of the matter is that this attitude of let’s just spend because it doesn’t matter whether or not there is money in the checking account is irresponsible. If elected officials don’t want to take the heat for raising taxes, then they need to make the difficult decisions to cut expenditures. Again, this means setting priorities and deciding what are core state services and programs.

While those spending cuts will be just as politically unpopular, they will be unpopular with a smaller circle of constituents. Regardless, lawmakers must remake the connection between constituent demand for services and the fact that it does matter who pays for those programs and services. So to that end, lawmakers who propose increasing taxes amid cries for no cuts in services or even for more services are probably more responsible than those who want to spend the nonexistent money.

And lest we overlook another way taxes can be raised, it should be noted that taxes can be raised by repealing such goodies known as tax preferences. These include exemptions, exclusions, and tax credits. These are just as much an expenditure of tax dollars as an appropriation of funds in the state budget. Repeal of these tax preferences will have the same effect as raising additional revenues. Thus, this is another strategy that lawmakers may consider as they try to satisfy their appetite for spending taxpayer dollars.

With the opening of the legislative session only a few weeks away, hold on to your wallet because there is a good possibility that we may be looking a tax increase in the face if lawmakers can’t cut spending.

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.