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Opportunity Missed If Downsizing Ignored

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By Lowell L. Kalapa
(Released on 4/26/09)

As the legislative session winds down, it is well worthwhile to pause and take account of the lessons learned and the opportunities missed by lawmakers this year. While it will be another couple of weeks before the gavel adjourns the session, there still might be time for redemption.

One of the lessons learned, at least for some lawmakers, is that earmarking revenues that formerly were receipts of the general fund reduces the flexibility that lawmakers need to respond to changing priorities. Such is the case of the earmarking of the state’s conveyance tax. Once a receipt of the general fund, lawmakers decided that it was a good source to fund programs like the natural area reserve program and affordable rental housing and more recently the acquisition of conservation lands. Originally set at a nickel per hundred dollars of valuation, lawmakers doubled the rate and earmarked various portions for these programs.

But now that there is a huge gaping hole in the general fund spending plans, lawmakers want to take some of it back into the general fund. But the hue and cry from the various beneficiaries of the earmarked funds is deafening, so lawmakers think that they can squeeze more blood out of the conveyance stone by raising the rate even higher on higher valued transactions of residential property thinking they will get those rich people who purchase million dollar plus homes without realizing they are also penalizing sales of large affordable housing complexes like Kukui Gardens. Oops, mistake, lesson yet to be learned.

Then lawmakers have learned the hard way about unbridled tax expenditures like the tax credits for investing in high technology enterprises. The fact that the cost for the tax credits soared to well over a $100 million in recent years stunned lawmakers. That price tag by comparison to funding the various departments, perhaps with the exception of the department of education, is staggering. But the horse is out of the barn and to try to close the barn door has proven difficult as beneficiaries of the credit cry foul and declare that any such efforts to contain the losses are shortsighted. Meanwhile those very beneficiaries seem to be blind to the fact that the state doesn’t even have enough money to buy textbooks for the classrooms so that the next generation of students can get the education that will help them compete for those high technology jobs the tax credits are supposed to be creating.

As lawmakers tried to address the more than $2 billion deficit in the state’s general fund budget, they seem to have realized that they were scraping the bottom of the barrel as every possible source of added revenue has been tapped. And increasing tax rates on existing revenue sources would further damage the state’s fragile economy. They have come to acknowledge how damaging the general excise tax can be to not only consumers but to businesses as well. They have learned that any increase in the general excise tax rate will exacerbate not only the cost of doing business in Hawaii, but also the consumer with the greater burden falling on the poor.

Although lawmakers seem poised to raise the tax on smokers by upping the tax on cigarettes and other tobacco products, they have come to accept that raising the tax on the other “sin,” alcoholic beverages, won’t help fill the hole in the state budget as so much of the alcohol consumed in Hawaii is by tourists. Without those tourists, tax resources, like the liquor tax, or the surcharge on rental cars or even the hotel room tax, will not generate the kind of revenues lawmakers need to fill the budget hole.

And that is why it is interesting to note that lawmakers plan to hike the TAT an additional two percentage points over this and next year. With the dribble of visitor arrivals and hoteliers doing what they can to attract visitors by dropping room rates or adding other amenities to their hotel packages, it makes little sense to hike the TAT as it would counteract the efforts to make hotel rates more attractive. Perhaps it is a lesson to be learned when revenues don’t pour in as expected.

Finally, perhaps it is a missed opportunity or an opportunity yet to be realized and that is the need to downsize state government. It is quite obvious that over the years lawmakers have attempted to be everything to everyone. And that might have been okay if, in fact, Hawaii’s economy was not so dependent on outside factors such as the national global economy, that, in fact, the state could survive without the investment of outside capital. Hawaii has always been known as a capital short state and in order to attract capital, Hawaii has to demonstrate that there is opportunity to make a profit, but with such a burdensome, overly large state bureaucracy, that prospect grows dimmer by the day. Thus, it is time to seize the opportunity to downsize state government.

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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