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Putting Ego Ahead of Hard Work Leads to Bad Legislation

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By Lowell L. Kalapa
(Released on 5/10/09)

What is it about being elected to office that somehow makes the person omniscient? That is what appears to happen to lawmakers who suddenly become all knowing.

That is apparently what has given rise to a number of bills that are passing the legislature with either flawed mechanisms or flawed logic. Take, for example, the bill that will increase the conveyance tax on higher valued transactions, be they residential or commercial or industrial or agricultural property. Beneficiaries of the largesse from this tax advocated for an increase in the rates because, of course, they will get the windfall. However, did lawmakers think that this would only apply to those luxury homes on the Kohala Coast or along the shores of Wailea and Kaanapali? And they imposed higher rates on residential property that will not be owner occupied. It certainly leads one to believe that lawmakers thought they were targeting those rich owners of second homes in Hawaii.

After all, argued beneficiaries of the tax increase and lawmakers who took up their cause, Hawaii has amongst the lowest rates on transfers of property in the nation. Look at Vermont, advocates pointed out, where the rate is $1.25 per hundred dollars of value of nonresidential property and 50 cents per hundred dollars of value for residential property. Of course, they forget that one can probably buy a single-family house in Vermont for less than $100,000. Oh well, Hawaii lawmakers seem to like to be first in everything, so why not have amongst the highest conveyance tax rates in the nation. Who cares that the higher rates will be applied to the mall where we shop for our groceries and shoes? Those retailers will just raise their prices and take more from their customers to offset the cost of the conveyance tax.

And then there are the anti-smoking advocates who believe that raising the tax on cigarettes and other tobacco products will drive smokers to quit. And maybe that is a good thing if one considers the health consequences, but as far as the hole in the state’s budget is concerned, the issue is one of money. If Congress had not pushed the federal tax on cigarettes to more than one dollar per pack, the 20 cents per pack increase adopted to the already established phased in increase per pack that will rise to $3 per pack by the year 2011 might not have had an adverse impact. However, with the combined state and federal tax increases, the tax per pack will be over $4 by the year 2011.

Again, from a health point of view, the increase might be a good thing in curbing what many see as a bad health risk. But in this case, lawmakers are depending on an increase in revenues to help balance the budget. However, if the higher tax rates push the total cost of a pack of cigarettes even higher and the anti-smoking advocates succeed in getting people to quit, what will happen to those expected revenues? And given that the financing of the cancer research center and community health centers is dependent on revenues from the cigarette tax, what will those agencies do when revenues don’t materialize as expected? Raise the rate once more?

Then there is the legislative effort to capture more revenues from other tobacco products. Snuff, pipe tobacco, cigars, and chewing tobacco are currently taxed at a rate of 40% of the wholesale price of the product. Looking for additional revenues, lawmakers decided to not only increase the rate to 70% on other tobacco products but to also begin taxing little cigars which look like cigarettes at the same rate as cigarettes.

The problem is that to distinguish between little cigars and larger cigars which would be taxed at 50% of the wholesale value, the wholesaler would have to measure the circumference of the cigar. Anything less than a ring gauge of 30 (less than .467 inches in diameter) would be considered a little cigar and taxed as a cigarette, while anything larger would be considered a large cigar and taxed at 50% of its wholesale value.

The problem is that no other state categorizes cigars based on the “ring gauge” so the department of taxation and wholesalers would have to establish a brand-new system that has little, if no experience, in other jurisdictions. Ooops, mistake, guess lawmakers knew something that the industry and tax officials don’t know.

With vetoes of tax bills flying fast and furious, this latter bill is one that needs reconsideration, as implementation of the bill will engender untold costs for both the taxpayer as well as the department of taxation. Well intended as it may have been, like the others, enactment will have unintended consequences.

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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