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Making Political Hay

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By Lowell L. Kalapa
(Released on 2/22/09)

The trouble with politics is more often than not that it gets in the way of what is in the best interest of the people. Such is the case in the debate over whether or not the general excise tax exemption for gasohol or alcohol-blended gasoline should be allowed to expire.

An exemption had been on the books for more than two decades as an attempt to encourage the use of alcohol-blended fuels when the administration mandated that all gasoline had to be blended with alcohol in April of 2006. However, the existing exemption for alcohol-based fuels expired at the end of 2006, putting the general excise tax back on those fuels beginning on January 1, 2007. Pandering to their constituency, lawmakers reinstated the general excise tax exemption on alcohol-based fuels for a two-year period beginning on July 1, 2007.

After last year’s experience at the gas pumps, it appears that some lawmakers want to make the exemption permanent. After all, in these hard times they don’t want to put a strain on drivers. Although that may sound noble, there is also a huge gaping hole in the state budget as tax revenues decline in these difficult economic times. And the some $40 million would go a long way to start filling that hole.

Lawmakers also seem to forget that although the cost of the general excise tax is passed along to the customer, in this case the motorist, the tax itself is imposed on the business for the privilege of doing business. Thus, the exemption favors the gasoline companies and gasoline dealers over every other business in the state. It is surprising that lawmakers would want to extend such favorable treatment when only a few short years ago those very businesses were vilified and threatened with a cap on the price they could charge their customers.

Advocates of making the exemption permanent argue that raising the cost of gasoline by adding the 4% (4.5%) tax to the price at the pump will merely increase the cost of transportation in Hawaii. What they want to acknowledge is that by subsidizing the cost of fuel with the exemption, the state contributes to the continued reliance on fossil fuels. Inasmuch as lawmakers have sworn to get the state off of its dependence on fossil fuels, extending the subsidy of gasoline seems somewhat hypocritical.

Indeed as we all learned last summer as gasoline prices approached $4 per gallon, we were forced to change our habits as it became more and more expensive to fill up our tanks. As a result, drivers were more careful about the trips they made to the grocery store while others gave up their personal automobiles in favor of mass transit. Consumers took greater interest in hybrid vehicles that could go dozens of miles on a single gallon of gasoline. People car-pooled while others either walked or bicycled to their jobs. And as electric costs soared, it became politically correct to be “green.”

Thus, adding back the general excise tax to the cost of gasoline would encourage motorists to think twice on how much fuel they consume and make choices as to how they are going to spend their limited household budget. And contrary to the accusation that this is a tax increase, one should remember that it is making this particular business pay what all other businesses are required to pay for the privilege of doing business in Hawaii.

Although this legislative session is far from being over, a close examination of the impact that continuing the exemption for gasoline will have is imperative. If the exemption is continued, it is almost certain that either other taxes will have to be increased or some programs will be eliminated. By continuing to subsidize this fossil fuel while elected officials are proclaiming to be green will make them look like hypocrites.

Finally, given that the use of alcohol-blended fuels is now mandatory, the reason for the exemption no longer exists, that is to encourage the use of alcohol-based fuels. Even the use of such blended fuels is coming under question as to the efficiency of the fuels like ethanol which can be used for gasohol.

What the exemption and mandate for alcohol-blended fuels shows is the hazard of making decisions on a leap of faith without doing all the prerequisite homework and learning everything there is to know about the issue. Granting a tax preference like this exemption can give rise to unintended effects. In this case, it was the further encouraging of the use of fossil fuels and it put a big hole in the state’s finances.

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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