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Buying Your Way Out Of Problems Rather Than Setting Priorities

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By Lowell L. Kalapa
(Released on 4/25/10)

As lawmakers ready themselves to vote on the state spending plan for the coming fiscal year and try to close the more than $1.2 billion revenue shortfall, some are wondering how Hawaii got into this mess.

Certainly, the national and global recession contributed to the financial disaster facing the state, but by no means should that absolve policymakers and administration officials both past and present. The problem evolved over years as tourism began to hit its stride during the mid-1980’s. Fueled by the Japanese bubble, the visitor industry grew nearly every year until the bubble burst.

All of this growth in economic activity spurred lawmakers to find new ways to spend the windfall of tax revenues. Add to that in the mid-1980’s the transient accommodation tax (TAT) that was adopted, but instead of designating the proceeds for the convention center, as the hotel industry had requested, the money went into the general fund for nearly six years. And less readers forget, the hotel industry went into the 1986 legislative session willing to pay a TAT of 2% provided the money was used to build the convention center, but when the lights went out on that year’s session, the hotel industry found themselves paying a 5% TAT with no money designated for the convention center.

Those revenues created an embarrassing situation by the end of the decade with the state sitting on a general fund surplus that approached a billion dollars. Not wanting to reduce tax rates and, therefore, the amount of taxes collected, the legislature and the administration resorted to a number of machinations. Among those was to be generous to the counties by “sharing” some of the TAT windfall with the counties as a state grant-in-aid program. The first year of the “sharing” the legislature gifted the counties with about $100 million in TAT proceeds, followed the next year by establishing the current formula for sharing a portion with the counties.

But having given the counties a chunk of the TAT change, when the selection of a convention center site finally rolled around, lawmakers realized that they had given away too much of the collections to the counties. And when the numbers were finally penciled out, lawmakers found that they had to raise the TAT rate by one percentage point to 6%. Once again the legislative response to a problem was to merely to raise taxes.

About the same time lawmakers were challenged with the growing problem of the lack of affordable housing in the state and the growing problem of deteriorating state parks and hiking trails. Again, not wanting to set priorities or to take funds from other programs or services, lawmakers dipped in the tax pot and targeted the state’s conveyance tax which they doubled from 5 cents to 10 cents per hundred dollars of value transferred.

After all, who could argue over a measly nickel? And who could be against creating more affordable rental housing or taking care of the “aina?” But over the years legislators have returned to this fountain of revenues because it is so innocuous and the average taxpayer usually pays this tax only once or twice in their lives. In more recent years lawmakers have made it sound like higher conveyance tax rates were merely socking it to the rich and second homeowners who could afford million dollar homes. Unfortunately, the tax also applies to all types of nonresidential property making already expensive site costs even more costly.

The point, again, is that whenever lawmakers encounter a new problem instead of setting priorities for what revenues are already collected, they merely turn around and find a new tax to impose or to raise current tax rates or impose additional fees and user charges.

The latest effort comes in the form of the “barrel tax” which will slap a one-dollar tax on every barrel of petroleum products imported into the state to supposedly fund the Hawaii Clean Energy Initiative (HCEI). Again, the new and increased tax will do nothing more than add to the already high burden of taxes which, in turn, will make it even more difficult to survive in Hawaii for families and businesses. Those who criticize this move are beaten back by the argument that Hawaii needs to get off its dependence on fossil fuels and this is the only way we can accomplish that mission.

But no one reminds advocates that the money could have come from some other program instead of burdening taxpayers with yet another tax. That’s because lawmakers do not have the will to set priorities for what limited resources there are and eliminate funding of other programs to fund such priorities as the HCEI.

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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