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Unfortunate when You Can’t Afford It

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By Lowell L. Kalapa
(Released on 10/25/09)

As consumers learned over the past year, equity is a matter of what the world is willing to pay for something, creating value as long as there is a demand for the commodity which in many cases was one’s home.

Once that demand lessened or disappeared, the value or equity also disappeared. However, many consumers relied on that value or equity to “pay” for the shopping sprees figuring that they could always borrow against this “equity” to pay for their spending. But once demand weakened and consumers no longer had that equity against which to borrow, the credit markets froze on the fear that those loans may not be repaid. Credit was no longer free flowing, putting a pall over the real estate market, driving values down as homeowners and developers could no longer unload their properties for more than what they had paid.

The same observation can be applied to government. For years when the economy grew by leaps and bounds first with the advent of the jet age, the economic base moved from agrarian to a service base as the visitor industry grew and flourished. Sure, the visitor industry had its ups and downs but through the years it has become a solid foundation for economic growth.

At the same time, lawmakers looked upon the goose that laid the golden egg as a large target upon which to set its sights for any and every source of income for the state and counties. At the state level, a hotel room tax was enacted after nearly two and a half decades of statehood and the arrival of the first jet service to Hawaii. Originally predicated on the argument that Hawaii needed to build a “world-class” convention center, lawmakers went beyond what the hotel industry had agreed to take on, a 2% hotel room tax rate, and instead slapped a 5% rate on hotel rentals. And instead of setting the money aside to build the convention center, lawmakers funneled those funds into the general fund for more than three years.

When agreement could not be reached on the site of the convention center, lawmakers decided to get rid of the pesky counties who had come back asking for more subsidies from the state and turned over nearly all of the collections of the hotel room tax or transient accommodations tax (TAT). But during the three years before the proceeds of the TAT were turned over to the counties, lawmakers went berserk trying to find ways to spend those tax dollars. When their creativity reached its limit, they thought up ways to hide the excess funds in what is called “special funds.”

But the damage was done, state government had expanded beyond its means so when it came time to set money aside to build the convention center, the TAT rate had to be increased to 6%. And then the state hit a brick wall in the early 1990’s as the economy began to stall. Tax revenues failed to materialize, but then, like now, lawmakers feared the curse of a “tax increase.”

Not wanting to cut programs and services, lawmakers raided all those special funds in which they had hidden general fund dollars from the better times of the Japanese bubble and the windfall of the TAT. For lawmakers, they thought that socking away all those general funds into special funds was prudent, but that was the furthest from the truth. All that strategy accomplished was to set up future lawmakers, the lawmakers of today, for a very hard landing as little was done back then to curtail the growth of government.

So how does this tale of the growth of state government parallel the current economic crisis facing our nation? State lawmakers mistakenly assumed that the economic good times were endless and that the economy would continue to grow into the future. As a result, lawmakers continued to expand programs and services paying for them with new resources when they ran out of tax resources. They refused to heed the warning of the mid-1990’s economic slump with the burst of the Japanese “bubble” by raiding special funds to finance the shortfall instead of downsizing government. Only when they ran out of ideas to turn the economy around did they relent and lower taxes, but not by very much nor as rapidly as necessary.

While government in Hawaii may not face “foreclosure” like many homeowners across the nation, the impact will be nearly as bad on a relevant scale. The pain that many will endure both within and without government will be unlike any crisis before. However, if we are to emerge a vibrant and stronger community, then lawmakers must shrink the size and role of government in Hawaii. What we do know is that government has become an obstacle to economic vibrancy and prosperity in Hawaii.

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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