(Released on 4/17/11)
While lawmakers and administrators struggle to close the billion-dollar shortfall in the general fund budget and search for ways to fund the last three months of this fiscal year, hopefully they will also look at these bleak times as an opportunity to reshape and reform state government.
Not having all the resources to fund government at its current level prods lawmakers to either raise taxes or find ways to reduce spending. Although lawmakers tabled the idea of an across-the-board increase in the general excise tax rate and at the least the Senate seems unwilling to tax the pensions of seniors, the only large source of additional revenues appears to be the suspension of several general excise tax exemptions. However, as this column has noted previously, those exemptions that have been characterized as “special interest” will have a substantial impact on all residents.
Because many of those exemptions were designed to reduce the pyramiding effect of the general excise tax, the suspension will have the same effect as raising the general excise tax rate. However, because those exemptions generally apply to transactions that do not involve sales to the general public, the financial impact will not be clearly visible to the majority of the public. Instead, the additional cost of the tax will be “hidden” in the cost of the goods and services that will no longer benefit from the suspended exemption. For example, building a new home or putting an addition on your house or business? The suspension of the contractor/subcontractor deduction will mean that the amount received by all subcontractors on your project will include the 4% general excise tax twice, once when received by the general contractor and another when received by the subcontractor.
Small businesses, that little mom and pop flower shop or greasy spoon, will see their rent go up as the suspension of the sublessee deduction will mean that instead of paying the equivalent of a 0.5% general excise tax rate on their lease, they will instead see a 4% rate slapped on their rent. There goes the price of your morning loco moco! Because small businesses tend to need small spaces in which to conduct their business, they usually sublease that small square footage from someone who has taken a large amount of space with the intent of holding that space for future expansion. As a result, the small business may be at the end of a long chain of leases and subleases. As each of those sublessees see their rent subject to the higher general excise tax rate of 4% instead of the current 0.5%, the cost of doing business will also rise and that cost has to be recovered in the prices charged to the customers of that small business.
In the long run many of these tax increases will have a devastating effect on the economy as many businesses will not be able to hike their prices enough to cover the cost of the higher tax burden to the point where customers will stop buying and go elsewhere and those small businesses will go out of business, taking the jobs that Hawaii’s families so desperately need during this economic recession.
So lawmakers are faced with the hard decision of raising taxes by adopting proposals like suspending the general excise tax exemptions or raising the tax on liquor, which will also have an impact on economic activity, or they can begin to make the structural changes that will prepare state government for the future. Surely critical among the restructuring elements is the reduction in the cost of personnel either by reducing the number of positions or reducing the compensation of public employees by reducing wages or reducing benefits.
There are no ifs, ands, or buts about this issue as it is very clear that with more than 70% of the state’s budget tied up in personnel costs, both wages and benefits, it is a major contributor to the inability to control costs. The public employees may not like the idea of bringing these costs under control, but sooner or later they will have to realize that neither the taxpayers nor the state’s economy can continue to carry these costs at the current level. Thus, the choice is to reduce compensation – wages and benefits – or eliminate positions.
And as we have learned with “furlough Fridays,” reducing the number of hours worked merely creates a backlog of work to be done. That’s where technology can help government work more efficiently or “smarter” by automating much of the mechanical shuffling of papers and forms, eliminating the need for many clerical positions, positions that are now vacant anyway.
Thus, while the current financial situation remains a challenge, it should also be viewed as an opportunity to change how government works to better serve the public.