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Omnibus Tax Measure Likely Unless Public Employees Give

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By Lowell L. Kalapa
(Released on 4/5/09)

With more than two-dozen tax measures that would either raise tax rates or eliminate exemptions and credits still under consideration at the state legislature, the likelihood that taxpayers will be hit with higher taxes grows by the day.

At the same time, lawmakers are struggling, trying to balance the budget as the revenue outlook continues to decline. What seems to amaze their voting constituency is that, at least to this point, the public employees are unwilling to talk about some sort of compromise to help balance the budget. Although the leaders of the public employee unions have to do their best to fight off any concessions, lawmakers are at a point in the session where they need to begin to finalize the state’s spending plan.

At the same time, the governor has altered her course several times during the session, sending conflicting signals to lawmakers. At one point everything was on the table, from spending cuts, to possible tax increases as well as compromises by the public employee unions. Then at some point tax increases and the lay off of public employees could not be considered. When the House presented their version of the budget, there were nearly 400 employees that would have to be laid-off.

And that is basically the three options lawmakers seem to have: increase taxes, lay off workers, or make drastic cuts to program spending. In the case of the latter, cries have already gone up as this or that social service or education program is proposed for reduction or elimination. Of particular concern is the loss of the social safety net that provides care for the neediest of the needy.

What is even more disconcerting for lawmakers is that the governor is the only one who can negotiate with the unions as far as concessions, be it reduction in wages or benefits. And as the clock ticks down to the scheduled adjournment, lawmakers are getting antsy about if concessions will be made so they can factor those savings into the budget.

Thus, it is now up to the public employee unions to step to the plate. Although the House budget included the elimination of nearly 400 positions, the governor has indicated that she will not approve of any layoffs of public employees as it will just add to the number of unemployed in the state.

However, lawmakers may have no choice but to eliminate jobs if the unions are unwilling to compromise either on wages or benefits. True, as the unions point out, lawmakers can always raise taxes, but those who would suggest that alternative forget that the constituents of elected officials are taxpayers. Thus, lawmakers are a bit apprehensive about raising taxes, especially in a down economy. A tax increase would push Hawaii from a tax “hell” right into the fire.

Unfortunately, lawmakers have just come to the realization that they have tapped every possible source of funds. Every possible tax resource and every possible fee has been imposed to the point where lawmakers considered adding on an additional $5 to selected fees that the state already charges users of certain state services. They have considered raising the general excise tax, raising tax rates on upper income taxpayers, and raising the hotel room tax rate. But when it was pointed out that the general excise tax falls more heavily on the poor and drives the cost of doing business up at a time when businesses are caving under the burden of taxes and a slowing economy, they pulled back that idea. And raising the hotel room tax when there are no visitors coming to Hawaii or those who are coming are getting great discounts on their hotel rooms, such an increase would not generate the kind of money they need to balance the state budget.

Although lawmakers may just have to opt for one of those tax increase proposals, they would probably do so only after exhausting every other solution and one of those solutions may be to reduce the number of employees on the public payroll. Thus, in order to avoid the lay off of public employees, reductions in compensation and benefits have to be considered. And if the unions and mayors refuse, they will have to be held accountable for tax increases that will be necessary to close the budget gap, be it income taxes, general excise taxes or even real property taxes.

Although the public employee unions proclaim that they should not have to bear the brunt of the financial crisis with reductions in wages and benefits, tell that to the 1,900 former employees of Aloha Airlines or those Maui Pineapple employees who took a 10% pay cut, or the numerous other former employees of Weyerhaeuser or Molokai Ranch who are still looking for a job.

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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