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Reasonable Tax Policy Should Be Predictable

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By Lowell L. Kalapa
(Released on 7/12/09)

It was amusing to watch some of the leading economists volunteer to discuss good tax policy on cable television the other day. It seemed to be implied that being an economist also confers knowledge of what constitutes good tax policy. Unfortunately, being an economist does not necessarily mean one knows what is good tax policy.

While tax policy can and does influence how an economy will perform, tax policy in and of itself can either be good or bad for taxpayers and the economy. This is the case with a number of laws adopted by the legislature in recent years. One of the first laws of good tax policy is that a tax should be fair and equitable, treating people in the same situation equally and people in unequal situations differently and the tax should be imposed on each taxpayer’s ability to pay.

Tax credits, which are basically a reduction in tax burdens, are probably the most abused tax mechanisms in recent years with the largest violator of this tax tenet being the unbridled tax credits for high technology. Viewed as an incentive by advocates, the credits are conferred solely because a taxpayer chooses to invest in one type of business as opposed to another. In that sense, it is treating a certain type of business better than the tax system treats all other businesses.

The result is that the taxes that should have been paid by those investors are shifted to other taxpayers who either do not have the ability to make that type or size of investment, invested in another type of activity, or who do not have the means to invest at all. It is these latter taxpayers who are most affected by the shift in tax burden as they not only do not have the means to invest, but more than likely they are barely able to make ends meet and to pay their taxes. This situation is exacerbated by the current economic conditions where many of these taxpayers are struggling because of the economic slowdown as they lose their jobs or their hours are cut back to the point that they are barely surviving.

The result is what taxpayers witnessed this past session. Needing to balance the budget, lawmakers discovered that they had no where to go to raise money except to hang a tax increase on the “rich” upper income earners, on so-called rich property owners who buy and sell million dollar homes or businesses, and on the non-voting visitor. Because a huge burden of taxes is already being carried by middle- and lower-income taxpayers, lawmakers could hardly ask for more taxes from that category of taxpayer. On the other hand, the hue and cry from the wealthy investors in high tech enterprises was so loud that lawmakers were afraid to take much skin from those taxpayers.

Another principle of good tax policy is that the terms on which a tax is imposed should be certain and predictable so that taxpayers know what tax is owed and why it is being imposed. Such is not the case with the so-called “barrel tax” which will impose an additional dollar on every barrel of petroleum product brought into the state. The original tax of a nickel per barrel was imposed for the purpose of setting up an emergency fund that could be used should an oil spill occur and pollute the Islands’ shores. Initially, that made sense since there was a connection between the importation of the petroleum product and the possibility of a spill occurring.

Over the years, all sorts of activities that seemingly looked like they were related to the potential pollution spill by petroleum products were added to the array of things the barrel tax could fund. But this year was the ultimate insult to taxpayers when the proposal that is currently under consideration for veto by the Governor would increase the tax by 20 times and be used to fund alternate energy initiatives and supposedly insure the quality of food in Hawaii.

The problem is that the cost of the tax will be buried in everything taxpayers and consumers purchase in Hawaii as the increased cost of the “barrel” of petroleum will be included in all costs. As the price of goods and services increases because of the tax, taxpayers and consumers will not know why those prices have gone up other than the vendor has hiked the cost of those goods and services.

Magnanimous as the cause may be to secure energy independence for Hawaii, it will come at a very high price and at a price that is dishonest, as taxpayers will not know why they are paying these higher costs for living and doing business in Hawaii. If lawmakers want to subsidize the transformation of Hawaii’s energy independence, they need to be a little more honest with taxpayers and should be held accountable for raising taxes to fund such an initiative.

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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