Home » What’s News » Weekly Commentary » Make Tax Increase Transparent

Make Tax Increase Transparent

posted in: Weekly Commentary 0
By Lowell L. Kalapa
(Released on 2/8/09)

We all like that old story about not taxing you or me but taxing the man behind the tree, because people don’t like to pay taxes, but if revenues must be raised let those taxes be raised from anyone but you and me.

And that is just what lawmakers and administration officials would like us to believe, that if the state budget is to be balanced, taxes should be raised from selected taxpayers. In this case from smokers and drinkers as it has been alluded to that the taxes on cigarettes and alcohol are likely targets for revenue enhancements otherwise known as tax increases. From a political perspective, such a proposal would make a lot of sense, after all, people see smoking as a bad and unhealthy habit and drinking and driving is a major contributor to traffic accidents and deaths. Therefore, one would expect the majority of the public to support increasing the taxes on those products, as those consumers should pay for their “sins.”

Unfortunately, from a public finance perspective, raising taxes on these products will not produce the kind of revenues state government will need to offset the looming $1.8 billion shortfall being forecast for the fiscal biennium. The tax base for each of these taxes – the cigarette and liquor taxes – is so small that a substantial hike in the tax rates would be necessary to even begin to make a dent in the forecasted shortfall. In the case of the cigarette tax, the scheduled increases adopted a couple of years ago have kicked in and between the stop smoking campaigns and the higher cost of a pack of cigarettes, lawmakers can expect a serious decline in the consumption of this product if there are further increases. So instead of raising more revenues, a serious hike in the cigarette tax may, in fact, produce less revenue than more.

Similarly, lawmakers should realize that a good part of the alcohol or liquor consumed in Hawaii is not consumed by residents but by visitors who sit poolside sipping their Mai Tais. If, in fact, one were to divide the number of gallons of alcohol sold in Hawaii by its resident population, every man, woman and child would be lying drunk in the gutters of our streets. Thus, with the decline in the number of visitor arrivals, lawmakers can expect a concurrent decline in the consumption of alcoholic beverages and a shrinking of the liquor tax base. This also does not take into account what the impact of higher shelf prices will have on resident consumers of alcoholic beverages.

So from a public finance perspective, utilizing these taxes which already have a very narrow base to bailout the state’s general fund shortfall of $1.8 billion hardly makes any sense from the standpoint that the increased rates would have to be substantially higher and if raised to that point, those high rates may actually reduce consumption and, therefore, the taxes collected from those sources. In other words, these tax resources are not dependable because the purchases of these products are discretionary.

So what are lawmakers to do? Well, if lawmakers refuse to reduce expenditures, then, yes, they will need to find additional resources to balance the budget. This means either raising taxes or eliminating tax expenditures otherwise known as tax exemptions, tax deductions or tax credits. Lawmakers already know that eliminating tax preferences such as exemptions, deductions, or credits is difficult because each has its given constituency. But advocates are but a portion of the taxpayer landscape, so the likelihood is greater that lawmakers may zero in on eliminating those tax preferences.

But is that strategy being honest with taxpayers in general? Like the man behind the tree, we hope that someone else’s ox will be gored so that we won’t have to endure the pain. Not having to pay increased taxes, the general public will assume that everything is okay and they can expect state government to carry on as usual. That certainly is not the case. It is not business as usual, the state does not have the money to pay for everything it has underwritten in the past.

So a general tax increase, be it the income tax or the general excise tax, will underscore the relationship between the taxes we pay and the services we receive from state government. A general tax increase will give pause to taxpayers to ask the question whether or not we, as residents, need all the services being provided by state government. Do we, as taxpayers, need all of the bureaucracy and regulation that government has come to represent and are we willing to pay the price by way of a tax increase?

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.

Print Friendly, PDF & Email

Leave a Reply