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Next Stop, A Tax Increase

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By Lowell L. Kalapa
(Released on 4/10/11)

It appears inevitable that lawmakers will adopt a tax increase of some kind this session, that is unless there is such an outcry from taxpayers that a tax increase is the last thing Hawaii needs as it struggles to recover from the economic recession.

The cards on the table include taxing pensions for the first time in the history of the state, eliminating the deduction for state income taxes, limiting itemized deductions on the state income tax return, hiking the tax on alcoholic beverages, suspending several exemptions under the general excise tax and an outright increase in the general excise tax rate. All of these proposals are still under consideration as the legislature heads into the final quarter of the session and the period where negotiations take place in joint senate and house conference committees. The challenge for lawmakers will be to address the forecasted $1.3 billion shortfall in the state’s biennial budget.

In the last few weeks as lawmakers prepared their agendas for conference committees, holding hearings on these various proposals, it became increasingly apparent that the sights of lawmakers are fixated solely on raising enough money to keep state government operating. Various attempts have been made to rationalize and explain that the tax increases are necessary and that lawmakers have already made billions of dollars in spending cuts during the past two years and that the only alternative left is to raise more revenues.

Meanwhile the administration is calling its package of tax increases necessary to share the pain and the burden citing the cuts in state spending as evidence that the public sector has already done its share in shouldering the pain. They liken it to a canoe and the need for everyone to do their share in paddling the canoe.

Unfortunately, what the administration and lawmakers don’t seem to realize is that taxpayers have already “given at the office” suffering from lay offs, reduction in hours, and in many cases wage and salary reductions over the past two years. As businesses tried to cope with the downturn in the economy, many had no choice but to lay off employees or cut back their hours. In many cases, those who could not find ways to cope just plain went out of business, putting their former employees on the unemployment rolls.

In numerous hearings before legislative committees, business owners cited not only the economic recession as affecting their businesses but the rising cost of doing business in Hawaii, from hikes in the unemployment insurance premiums to rising health care costs to increases in commodities including everything from bathroom supplies to food, rising energy costs that affected their utility bills, whatever margin of profit they had has virtually disappeared over the past two years.

Now faced with the prospect of tax increases, many of these businesses predict that there will be even more layoffs coming as the increased tax burden will squeeze them even more. An increase in the general excise tax or the loss of some of the exemptions that are designed to address the pyramiding of the tax will guarantee increases in the cost of all goods and services while a tax on pensioners’ income will reduce their buying power.

When witnesses were asked to choose between a hike in the general excise tax rate and the loss of the pyramiding exemptions, most were stumped for an answer as doing either would have the same economic impact on the cost of living and doing business in Hawaii. Suspending the pyramiding exemptions, such as the deduction for subleases and the exemption of stevedoring activities, would mean the cost of the 4% excise tax would then be embedded in all subsequent transactions. So goods or services sold by a small business which subleases its space from a lessee of the fee owner would see the tax rate go from 0.5% to 4%. All goods, such as that bag of rice or that box of cereal, would now be more expensive as the cost of unloading them from an arriving ship would be taxed at 4%. And, of course, a flat across-the-board increase in the general excise tax rate to 5% will be felt by all consumers and the pyramiding of the tax at the higher rate will also drive the cost of goods up.

Thus, while the general excise tax may be very productive in providing the needed revenues, it is also the worst choice insofar as the health of the state’s economy. Hopefully lawmakers, as well as the administration, will realize that the greater challenge – greater than the budget shortfall – is the recovery of the state’s economy and raising the general excise tax won’t help that effort! The canoe may just huli (turn over).

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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