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Next Comes the Tax and Fee Increases

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By Lowell L. Kalapa
(Released on 3/15/09)

At the midpoint of the 2009 session, one can say that everything is in play, from spending cuts to scrounging for additional resources, to raising taxes to raising fees, to swiping the City & County’s mass transit funds to taking back the hotel tax revenues from the counties.

It is no longer IF taxes are going to be raised, but more like which taxes will be raised. One has to admit that lawmakers are turning every stone and trying to be creative in addressing the looming budget shortfall which now has passed $2 billion for this fiscal year and the next two years of the fiscal biennium. While the legislature’s first run at the biennial budget will be made public this week when the House Finance Committee prepares to send the House version of the state budget to the Senate, it is almost guaranteed that there will be major reductions in spending.

However, the budget will still fall short of being balanced without the so-called “revenue enhancement” measures. While lawmakers have the second half of the session to settle on what will make up this package of tax and fee increases, taxpayers should be well forewarned that some kind of increase is on its way.

Of course, there are the usual targets such as an increase in the general excise tax. One proposal would raise the rate by 0.5%, while another would raise the rate and specifically earmark the revenues from the increased rate for education. Yet another proposal would lower the general excise tax rate to 3.5% but then impose the tax on nonprofit organizations, except for religious organizations, that are currently exempt from the tax. That measure also deletes a number of exemptions from the general excise tax law.

Obviously, lawmakers believe that if they broaden the tax base, they can lower the rate. Unfortunately, they also seem to forget that the reason why the federal and state laws recognize nonprofit organizations with an exemption from the net income tax is that many of these organizations provide services or goods that government might otherwise have to provide, and usually far more efficiently than government could have provided those same services. Everything from social services to education to health care, the indirect subsidy provided by the tax exemption is far less costly than if government had to raise taxes and provide the same services.

Then there are the personal income tax proposals that would raise the rates on upper-income taxpayers with rates that are nearly double the maximum rate under current law. Although many of the bills have carrots in other forms, like increased tax credits for renters and for the purchase of necessities like food, all of the income tax bills are designed to raise more revenues.

Then there are the specific types of taxes paid by certain taxpayers like the hotel room tax otherwise known as the transient accommodations tax or TAT. Although the visitor has always been a popular target for tax increases in the past, raising that tax rate at a time when visitor arrival figures are plummeting probably won’t generate the kind of money lawmakers need to balance the state budget. The same can be said of the “sin” taxes like those on alcoholic beverages and cigarettes. To a large degree, a good portion of the consumption of these products is due to the visitor. So raising these taxes may also be of little help in balancing the state budget.

Then there are those taxes which the everyday consumer does not see yet pays because they are imbedded in the cost of the product the customer purchases. Lawmakers have looked at the public service company tax which is imposed on utility companies like the electric, gas and telephone companies for a rate increase. If that tax increase is adopted, it will show up in customer bills as part of the charges for their utilities and customers will just assume that the utilities are charging more for their services.

Another stealth tax that lawmakers are looking at for an increase is the environmental response tax that readers learned about a couple of weeks ago. It is imposed on every barrel of petroleum imported into the state. Discussions have suggested increasing this tax rate by as much as 200%! If that happens, then the added cost will be included in every gallon of gas consumers purchase as well as in the cost of their electric and gas bills.

There is no doubt that the state is in a financial crisis and that taxes will have to be increased to cover the shortfall. However, some effort needs to be made on the other side of the ledger to reduce spending as well. Lawmakers need to be judicious with their efforts to produce the revenues they need to balance the budget as any tax increase in this economy will have devastating effects and slow the road to recovery.

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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