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Zealous Lawmakers May Just Raise Your Taxes

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By Lowell L. Kalapa
(Released on 2/7/10)

For some legislative observers, the very idea that lawmakers will raise your taxes had become more of a “fait accompli” even before the starting gun had been shot.

With such a huge shortfall in the state general fund budget of more than $1.4 billion, lawmakers and political pundits apparently see no other alternative than to raise taxes. But pose that question to the average guy on the street or to the struggling small business person trying to sell tee-shirts in the alleys of Waikiki and that is not the last and final answer. It is these folks who know what it is like to bear the “brunt” of this recession and they are wondering just when all of this rhetoric about everybody bearing their fair share of the burden of the recession will come to an end. After all, the little guy (and many of the bigger businesses as well) has already had to deal with the most difficult decisions they have had to make in recent years. Business owners have had to decide whose hours will be cut, which workers laid off, and whether or not they could afford to raise prices just to cover the basic overhead costs.

Although there will, no doubt, be additional cuts made to programs and services, some lawmakers are talking about increasing taxes, eliminating exemptions, and reducing deductions. Last year lawmakers learned how politically difficult it is to raise taxes as they adopted taxes aimed at very well-defined constituencies. After all, who could find fault in raising the income tax on the “rich” as lawmakers hiked the maximum income tax rate to 11% and started imposing higher rates on individuals making $150,000 and couples with $300,000 of taxable income.

But instead of boosting personal income tax collections, collections of this tax have actually declined from the previous year by 9.3% for the first six months of the current fiscal year. At the same time, general excise taxes lag the previous collections for the first six months by nearly 10%. Thus, it makes very little sense for lawmakers to even think about hiking the tax rates of these taxes as the plain truth of the matter is that there isn’t much to tax if the current rates are producing even less than they did in the previous year.

Many years ago, we all learned in math class that no matter how large the number, multiply it by zero and the result will always be zero. That’s exactly what lawmakers are playing with here. So lawmakers decide to increase, say, the general excise tax rate, but spending continues to decline because there just is no economic activity. Will additional revenues be realized? Probably not if the economy continues to stumble. Similarly, if as a result of raising taxes more employers cut staffing or perhaps go out of business resulting in more people on the unemployment lines, the personal income tax base will probably continue to shrink along with that rising unemployment. So raising tax rates will be for naught if indeed the economy muddles along.

While lawmakers may protest that they have already cut muscle out of government, one has only to look at how state government spending has grown over the past ten years. Although general fund revenues have increased by just over 52% in the past ten years, general fund expenditures have risen by more than 68% during the same period. Instead of returning surpluses at the end of a year when revenues exceeded expenditures, lawmakers have habitually hung on to those surpluses and used those excess funds to expand government.

At the same time, lawmakers have shifted more and more programs that use to be funded by general funds into special funds, creating the illusion that government funded by taxes has not grown as fast. However, in the past 15 years, the portion of the state’s operating budget that has been funded out of special funds has grown from just over 11.5% to more than 17%, thus more and more programs and services but are now being funded out of dedicated sources of revenues called special funds.

While lawmakers may not want to repeal or eliminate many of these programs because they have specific constituencies, they just might want to remember that the largest constituency is called taxpayers. Indeed taxpayers should feel insulted as lawmakers attempt to find stealth strategies to raise more revenues like the proposal to double the bottle fee and make it non refundable for the next three years to help address the school furloughs. What happened to the idea that the fee was supposed to get consumers to return the empty bottles?

Taxpayers need to make it very clear that tax increases are unacceptable after years of being taken to the cleaners with all sorts of new fees and increases in tax rates.

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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