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Ups and Downs of Those Revenue Collections

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By Lowell L. Kalapa (Released on 10/11/09) As reports of the state’s general fund revenue collections last month sparked another call by the administration to further tighten the state’s spending belt, there were others who looked at the negative 5% growth rate as an indicator that the economy was improving as it was less of a decline than the negative 9% growth rate reported for the first month of the fiscal year. While that may appear to be logical, reading the revenue collections report based on month-to-month comparisons this early in the fiscal year is somewhat like guessing what color socks you just pulled out of the drawer in the dark of the morning. Quirks in collections like the number of days in the month, the fact that the collection deadline fell on a holiday or the more obvious delay in opening those tax returns could account for such a swing when only two or three months into the new fiscal year. What is more crucial to the forecast of general fund tax collections is what is happening at the national and international level. For example, the airlines have already announced declines in the number of seats they will have for travel to Hawaii this fall. That translates into less visitors during what is normally a soft period for the visitor industry. It is perhaps a reflection of the mood of consumers as they continue to hold back on spending. The drop in the housing market nationwide and especially in California, which accounts for about 20% of our visitors, has kept consumers jittery about spending what dollars they have. In fact, housing prices have fallen by more than 31% in the nation’s 20 largest cities since the peak of July 2006, and about 12% since last year’s financial meltdown. On top of the bad news in the housing market, the stock market is still down about 33% since last fall’s financial debacle. This has caused consumers to downshift into a savings mode and spend less. This is compounded by the huge debt load that consumers racked up over the past few years relying heavily on home values to underwrite their free spending. Now that housing values are down, many are stuck with more debt than equity, putting a chill on freewheeling spending. The consumer savings rate, which hung in negative territory in the years leading up to the fiscal crisis, leaped by more than 7% in May according the U.S. Commerce Department. This measure of savings as a percent of disposable income dropped to 4.2% in July. However, there is no doubt that consumers are tightening their belts and socking a little bit more away in savings rather than spending every single penny they can get their hands on and then some by racking up credit card debt. Although this is prudent, it comes at a time when consumption is needed to get the economy rolling again. But what it does tell us here in Hawaii is that consumers will be buying less and spending less and taking fewer vacations. One only needs to look to California which in the past provided nearly 20% of the visitor market which now continues in crisis mode as its state government labors under rising deficits and a dysfunctional legislature that could not come to an agreement over the state budget until mid September. Even investors, be they on Wall Street or in our own back yard, have turned conservative. Where investors chased big returns only a few years ago in the high technology industry on cutting edge products and services, they are now seeking to protect their money by investing in instruments such as bonds and certificates of deposit. Against a backdrop of a more than 50% drop in stock prices from their high in 2007 and slumping housing prices across the nation, investors feel burned and are running for cover. To give you an idea, the Federal Reserve estimates that there is now more than $9 trillion parked in cash or cash-equivalent accounts despite yielding earnings of less than 1%. And as consumers direct more of their funds toward such secure but low yielding accounts, the more they will have to save to make up for the smaller investment returns. No doubt this sensitivity toward preserving principal affects the spending patterns of consumers and, therefore, there will be less consumption of goods and services. So is the economic outlook for Hawaii improving? It certainly does not appear so for the near future and tax collections will continue to decline, if not stagnate. That can only means government will have to tighten its belt further.

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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