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Fairness In Taxation A Matter Of Where You Are

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By Lowell L. Kalapa
(Released on 8/29/10)

There is probably no one who will dispute that a good tax system is one which treats everyone fairly. At least that is what many taxpayers would like to believe. Unfortunately, it is the definition that sometimes gets in the way of truly achieving a “fair” tax system.

So the old adage of, “Don’t tax me, don’t tax you, tax the man behind the tree,” comes quickly to mind as perhaps how some taxpayers see a tax as being fair. Fair, in this case, is that someone else pays the tax. Indeed, that is what lawmakers seem to practice in setting tax policy. As long as the tax increase they are pondering doesn’t affect their constituency, it is worth considering. After all, they don’t want to offend the voters they are counting on for reelection.

Looking back on the past five years, that is exactly the approach lawmakers have taken in order to shore up state finances as the state’s economy followed the national economy into recession. It is these subtle increases that made it difficult for lawmakers to justify an across-the-board tax increase as they realized that the nickels and dimes they had imposed on select taxpayers added to the overall tax burden.

Starting back in the year 2005, lawmakers approved the half percent general excise tax rate option for the City & County of Honolulu’s train that will be with us for the next two decades. While this tax increase was limited to Oahu taxpayers, the effect it has had on everything that is produced in Honolulu or shipped through Honolulu affects Neighbor Island residents as well. Lawmakers also imposed a new license fee on retailers of cigarettes and tobacco products and while it may seem limited to the price of those products, the compliance costs associated with the fee will be imbedded in all products sold by that retailer. The 2005 session also saw the initiation of the tiered conveyance tax where the tax rate goes up depending on the value of the transferred property and it is even higher for nonowner occupied residential property. This latter change is evidence of legislators’ ignorance of the source of rental housing in this state.

The 2006 session brought smokers in the state another increase in the tax on cigarettes and the legislature continued the $3 per day rental car surcharge that was supposed to have sunset after seven years. And although they passed an increase in the amount withheld on the sale of real property by nonresidents, it was vetoed.

Not wanting to raise the ire of drivers, lawmakers increased the tax on motor and aviation fuels by a penny per gallon during the 2007 session. It was sort of a sop to the growing problem in the state highway fund where deficits are being forecasted for the near future. Of course, this was also at the time when the controversial “gas-cap” was on everyone’s mind. Lawmakers also approved a measure that allowed the counties to increase the amount of the highway beautification fee from $2 to as much as $10 per vehicle registration. This was also the session when lawmakers slapped a fee on all shipping containers shipped into Hawaii to fund an invasive species program.

The 2008 session saw more funding efforts for “green” programs when lawmakers slapped a fee on manufacturers of electronic devices as a prerequisite to selling such devices in the state. Reasoning that the conversion to HDTV was just around the corner and consumers would be dumping their old television sets, this effort was adopted to make sure those who made the new HDTV’s be responsible for disposing of the old technology. Not one legislator stopped to think that this fee would merely be folded into the price of the new products. Lawmakers also realized that the measure they had passed in the previous year to fund the invasive species program was just unworkable, so they passed an entirely new approach to taxing imported goods.

Realizing that they already heaped on a number of new tax and fee burdens in recent years, lawmakers resorted to subtle changes in the 2009 session to increase revenues like reducing the amount of interest on passed due payments of tax refunds, suspending the capital goods excise tax credit, repealing the ability of gamblers to reduce the amount of their winnings by the amount of their losses, phasing out the personal exemption for high income earners, and increasing the income tax rate on “rich” individuals. Again targeting limited constituencies, lawmakers increased the TAT or hotel room tax by two percentage points over two years and again went to the conveyance tax by increasing the rates on more expensive transactions.

None of these increases are necessarily “fair,” but they certainly allowed lawmakers to run for cover and not be accused of increasing taxes.

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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