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Attacking Problem With Tax Increase Reflects Arrogance

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By Lowell L. Kalapa
(Released on 3/21/10)

Well, the other shoe has dropped and it now appears that unlike the House, which was willing to look at other ways to fill the looming general fund budget gap, the state Senate seems to be more than willing to solve the fiscal crises facing the state by increasing the general excise tax.

Bolstered by the public employee unions and the social service and health communities, state solons seem to believe that it is up to taxpayers to tighten their belts and cough up the money necessary to keep the public sector whole. Never mind the reality that the economy is in dire straits and that many in the private sector are already unemployed or the fact that many businesses have closed their doors over the past 12 months as the economic recession has taken its toll.

Never mind that Hawaii is already the fifth highest state with one of the heaviest per capita tax burdens and last year adopted the highest maximum income tax rates in the nation. Hawaii also carries the distinction of having some of the highest liquor and cigarette tax rates in the nation and leads the nation in the tax rate on beer.

Senators also seem to overlook the fact that state spending has basically out paced the growth in the state’s economy in the last 15 years. It has only been by smoke and mirrors that lawmakers have been able to circumvent the constitutional ceiling on general fund expenditures by moving many programs and services to special funds. In fact, when one measures state operating expenditures underwritten by the state general fund and special funds other than the transportation special funds, operating expenditures have grown by 90.3% while the measure of growth in the economy, as measured by total state personal income, has grown by only 80.0% in the period from 1995 to 2011.

The Senate strategy to balance the budget sends a message that it is more important to balance the budget than tighten state government’s belt. Doing so by raising taxes seems to ignore the fact that everyone else in the private sector is struggling themselves, working harder than ever to keep their heads above water and getting paid less. And now taxpayers will have even less to spend as they are asked to cough up more general excise taxes at the register.

Do lawmakers understand what having less to spend will mean for the businesses in their local neighborhood? Do they understand what having less to spend will mean to the employees of the local restaurants or grocery stores? Ah, but as the public employee unions point out in their quest for keeping the public sector whole that money is going to be spent by public employees so it will go back into the economy.

What the unions seem to overlook is that a dollar spent in the public sector is generally not as productive as one spent in the private sector. Thus, it takes more dollars to produce the same results when those dollars are spent in the public sector. They also seem to overlook the fact that because the general excise tax is increased, the cost of everything will go up and regardless of whether the customer is a public or private sector employee, the cost of goods and services will rise meaning less units will be sold at a far more expensive price.

And this is where there seems to be a real ignorance about the general excise tax. Although many seem to equate the general excise tax with the retail sales tax found on the mainland, it is the furthest thing from the truth. Unlike the retail sales tax, the general excise tax applies to transactions of goods and services. And in an economy where 60% of the economic activity is services, the modest 4% general excise tax rate would need to be raised to a rate of 10% or 11% if Hawaii truly had a retail sales tax as is found on the mainland. That would make Hawaii’s “sales tax” rate the highest in the nation.

What is truly scary is that if the general excise tax rate increase is adopted, how many of Hawaii’s businesses will not be able to cope with the increase and will close their doors, putting perhaps hundreds of employees out of work. That would create even more need for government provided social services, welfare and health services as families struggle to survive in this weak economy.

No, a tax increase is not the solution to the state budget crisis. It is high time that lawmakers admit that they are part of the problem by having created a state government that is much too large for this community to support.

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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