Quicksand, Furloughs and Layoffs

Someone asked the other day whether or not the governor did the right thing by requesting furloughs for state employees. Short of laying off state employees, furloughs are the only alternative to address the dramatic decline in the state’s revenue outlook.

When the state’s Council on Revenues delivered its latest round of bad news, the tax revenue picture dropped by nearly $185 million for the current fiscal year and another $420 million over the next two years of the fiscal biennium. In another words, the amount of money available to run state government is expected to shrink again by more than a half billion dollars. The legislature had already struggled to fill a nearly $2 billion shortfall while it was in session, where would government officials be expected to find yet another half billion in savings?

The unions continued their mantra that instead of lay offs and furloughs, the governor should raise taxes arguing that everyone should bear the burden of the economic downturn. They, and their membership, questioned why should public employees have to bear the brunt of the financial shortfall. They also argued that if their pay was reduced or if furloughs reduced their take-home pay, public employees would have less to spend in the marketplace, thereby delaying economic recovery.

While those were interesting arguments, they tend to ignore the reality that private sector employees have already taken a hit below the belt. They seem to ignore that nearly 20% of the almost 2,000 Aloha Airline employees who were put out of work more than a year ago have yet to find a new job. Those arguments ignore the fact that many of the housekeepers, bell persons, waiters and waitresses in Hawaii’s hospitality industry are working less hours, if working at all. And what about all those carpenters and other construction trades’ workers sitting idle on the bench?

Let’s see, the public employee unions and their members want all taxpayers to ante up more so that the public employee doesn’t have to lose any pay and, sure, public employees will have to pay the increased taxes, but at least they have a job and won’t be out any pay whereas many private sector employees will be taking home less pay and either have more withheld from their paychecks or have to spend more at the grocery store.

So the economists, many of whom are on the public payroll, say that the economy will take a hit with that loss of public payroll dollars, but have they asked themselves, just where would those dollars be found to fulfill the public payroll demands? Taxes, they may respond, but taxes on what economic activity? If Hawaii’s economy remains in the dumps as a result of the national and global recession, don’t expect any new dollars to flow into the economy so that they can be taxed to provide funding for the public payroll.

Even with the tax increases approved by the legislature this year, such as the higher income tax rates on high income earners and a two percentage point increase in the hotel room tax or TAT, one has to ask just how productive those resources will be if, indeed, the visitor industry continues to struggle? And while hotel keepers continue to lower room rates in order to attract visitors with bargains, that lower hotel room rate, even against a higher hotel room tax rate, will not produce as much revenue as lawmakers anticipate.

Advocates of the higher hotel room tax rate argue that Hawaii’s tax rate is amongst the lowest. Well, those advocates are about to find out that the amount of money produced is highly dependent on the room rate charged. In the past when hotel room rates could command lofty prices, having a low hotel room tax rate produced a heck of a lot of dollars by comparison to bargain hotel room rates say in Anaheim around Disneyland; motivating local leaders to set higher rates in order to generate the same amount of revenue.

The same goes for those advocates on increasing the conveyance tax, arguing that Hawaii’s rate was so low by comparison to Vermont’s where the rate is $1.25 per hundred dollars of value, but then again, one could probably purchase a single family home in Vermont for less than $100,000. Not so in Hawaii, and that is why lawmakers will find themselves, next session, with the undisputable reputation of really not knowing what they are doing and unwilling to do their homework. Instead, what they have done is painted themselves and the governor into a corner where the only choice left was to ask public employees to take furloughs and basically take a reduction in pay. Before public employees and their union leaders dig their heels in, they should do a reality check and see how taxpayers are bearing the burden of the economic downturn, because there just might be a backlash!

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.