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Passing the Buck for Tax Increases

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By Lowell L. Kalapa
(Released on 5/3/09)

In these last few days before the legislature is scheduled to adjourn, lawmakers are scrambling for cover as the word is getting out about the tax increases approved last week.

Raising taxes is the easy solution. Since lawmakers don’t like to cut spending because the various beneficiaries can be very vocal, the easy solution is to raise taxes on defined constituencies as opposed to targeting the broader population. As a result, bills that tax individuals with high incomes avoid the political bullet because lawmakers reason that those individuals are such a small slice of the population pie and besides, who can defend “rich” taxpayers?

Of course, what they overlooked is that small businesses tend to be formed as what is known as Subchapter S corporations where the income flows through the corporation but it is taxed as the owner’s personal income. Similarly, income of sole proprietorships is also taxed as income to the sole proprietor or individual. Thus, while these sums of income may be large, that income is usually ploughed back into the business so that the business can grow. But with the measure awaiting the governor’s signature or veto, the tax rates on these individuals will soar to 11% depending on the amount of income. So much for small businesses.

Then there is the hike in the transient accommodations tax (TAT) better known as the hotel room tax. If the measure that was approved by lawmakers becomes law, the TAT rate will rise from 7.25% to 8.25% this July, and to 9.25% next July. For lawmakers, this is a logical choice as the tax is largely paid by visitors, read non-voting, taxpayers. The problem is that right now with the national and global economy in the doldrums, visitors are not coming in the droves they once were. At the same time, the industry is deeply discounting room rates in order to attract potential visitors and the higher TAT rate applied against those lower rates may actually generate less revenue than lawmakers anticipate.

And while lawmakers think that raising the TAT rate will be absorbed by the visitor, they seem to forget that unlike major metropolitan areas where the visitor is on business, Hawaii remains largely a vacation destination where the visitor has a fixed budget for that vacation. As a result, with more of the visitor’s budget going to pay the TAT, there will be little left over for discretionary purchases such as tours and souvenirs. So much for small business.

Then there is the increase in the conveyance tax, which seems to be aimed at expensive real estate transactions. The rate would rise on transactions where the value is greater than $2 million and would apply to all transactions with even higher rates on residential property that will not be owner occupied. Thus, not only will residential properties sold or purchased be hit with these higher rates, but non-residential property such as commercial, industrial, and agricultural properties will suffer the consequences of this legislative grab. This is because lawmakers want to take back some of the funds that are currently earmarking for the natural area reserve program and for affordable rental housing.

Lawmakers continue to be oblivious to the fact that the sale or purchase of non-residential property means properties that will house a business or produce goods and services for consumers. Although it may not seem like a lot of money when compared to the amount of the transaction, the additional cost of the tax will eventually trickle down to the cost of the goods and services consumers purchase. And, of course, the higher rate on residential properties that will not be owner occupied overlooks the fact that rental property falls into this category. So a project like Kukui Gardens, which sold for more than $72 million, would be hit by this higher rate.

So why do lawmakers need to raise taxes? Well, one reason is that the leaders of the public employee unions are unwilling to give a little, be it furloughs, pay reductions, or cost sharing of benefits. They would rather urge lawmakers to raise taxes than cut any of their employee members.

Then there is that increase in legislators’ pay that they refuse to forego even for the period over the next fiscal biennium. Lawmakers did not even consider a token reduction in the pay increase. Again, another easy choice, instead of raising taxes.

Unfortunately, the public employee union leaders and lawmakers want everyone else to sacrifice so they can remain whole and that means socking it to you, the taxpayer.

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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