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Wait Not for the Other Shoe to Drop

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By Lowell L. Kalapa
(Released on 12/13/09)

This week all eyes will be focused on the state’s Council on Revenues as it weighs the recent trends in general fund tax collections and considers changes to its forecast for those collections for the rest of the year.

No doubt the Council will consider lowering its forecast in view of the fact that for the first four months of this fiscal year, tax collections have been posting a negative growth rate of nearly 11%. With more than a third of the year under the belt, it is doubtful that subsequent months will produce sufficient positive growth to bring this year’s collections in line with the Council’s September forecast of minus 1.5% for fiscal year 2010.

Given that outcome, administrators and lawmakers must begin to work on how they will address the shortfall between what will be brought in as tax collections and what was budgeted for the 2009-2011 fiscal biennium. It is estimated that based on the September forecast of minus 1.5%, the shortfall, between anticipated revenues and budgeted expenditures, is to be at least $1.065 billion. However, should other cost savings as a result of collective bargaining not be achieved, it is estimated that the shortfall by the end of June 30, 2010 could be as high as $1.4 billion.

Trying to overcome a $1.4 billion shortfall, which represents approximately a fourth of the annual general fund expenditures, will be a challenge. Although lawmakers may find it most expedient to call for an increase in taxes, nothing could be farther from what is best for the community. Perhaps consideration of a tax increase to offset this kind of hole in the state budget might be plausible during any other time, but it is the absolutely worst response in these dire economic times.

The slump in the state’s largest industry, tourism, the impact of fewer visitors, and those who do come spending less, is forcing a number of businesses, both big and small, up against the ropes. While smaller businesses suffer because of the lack of economies of scale, larger businesses usually carry a much larger burden of debt, needing lines of credit because of larger staffing and payroll costs or debt incurred as a result of expansion and renovation of facilities.

Thus, to impose an additional tax burden on businesses and families is just the wrong solution if the state is to ever to make its way out of this economic slump. Imposing that additional burden will merely mean that businesses and families will have to cut expenditures, reduce hours for workers or perhaps even close their doors a few days a week or perhaps permanently, putting even more workers out of their jobs.

So while lawmakers may think the silver bullet is to merely raise taxes, they need to think again. With all families tightening their belts, both the state and counties need to tighten their collective belts as well. But some lawmakers moan that they don’t know where to cut, as the services of their branch or level of government are all essential. Well, folks it is time to set some criteria as to what are truly essential government services.

Lawmakers can start with the textbook definition of what is an essential public service – those services which are critical to the health, safety and welfare of the community. Services like police and fire protection, sanitation, healthcare, education, and support for the poor. And even though these are critical services, the programs providing these services can be pared back to the bare essentials. For example, prior to the mid-1990’s there was no publicly provided after school care. Then the A+ program was created which actually took students away from private providers of after school care like at the Y’s.

That latter program underscores another criteria that can help lawmakers decide what is essential and what is nonessential. The question to be asked is whether or not there is a private provider of such services. For example, there are numerous building maintenance firms cleaning offices and other commercial spaces in the private sector. Why couldn’t this service be privatized? Because these services would be contracted out, if the private provider doesn’t do a good job, the firm could be fired and another contractor brought in. In the public sector, removing a non-productive employee is nearly impossible. Outsourcing this activity would not mean unemployed workers, as these firms probably would need to hire additional workers as a result of a new contract.

Finally, lawmakers can ask whether or not a program or service existed 10 or 20 years ago and if not, then one has to ask if the public didn’t need this service before, can they do without it now? Many agree that government has gone way beyond providing the basic services, a luxury taxpayers can no longer afford.

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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