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Expenditure Focus Rather Than Tax Policy

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By Lowell L. Kalapa
(Released on 9/9/12)

As reported earlier, the current Tax Review Commission seems bent on finding ways to raise new tax revenues as it has directed its consultants to come up with ways to find more money.

This effort is based on forecasts of what state expenditures will look like in the future and assumes that all current programs and services will have to be funded. In particular, the consultants have focused on the unfunded liability of the state retirement system and the unfunded health care programs for state employees and retirees. Of course, this runs counter to the mandate of the state constitutional provision establishing the Tax Review Commission that directs the Commission to evaluate the state’s tax system with an eye on fairness and equity and make recommendations with respect to tax policy.

The constitutional provision makes no mention of state expenditures and whether or not those expenditures are appropriate or acceptable. That is a job that is left to the state legislature, as it is the body that determines spending policy by appropriating the funds necessary to run state government. If, in fact, the Commission, and therefore their consultants, wanted to evaluate state spending, they should have evaluated whether or not overall state spending has outdistanced the constitutional mandate governing general fund expenditures. That’s because lawmakers over the last 30 years have shifted many general fund programs and services to special fund financing allowing general funds to be spent on new and perhaps unnecessary services.

What they would have found is that government has grown faster than the economy that has been asked to underwrite those expenditures. So instead of not having enough money, what the Commission should have learned is that state government has imposed a heavier and heavier burden on the Hawaiian economy. Instead, the Commission, and therefore their consultants, merely assumed that the current level of spending needs to be sustained into the future. The result is that the consultants were asked to come up with a slew of tax increases.

Oh sure, they looked at tax burdens, but instead of recognizing the uniqueness of Hawaii’s tax system, they instead took as a given national comparisons which have no clue about the breadth of Hawaii’s tax system.

For example, they took a District of Columbia study which had been done more than 30 years ago. The problem with that study, and many other national comparisons, is that they treat Hawaii’s general excise tax as if it were a “retail sales tax” like those found in many other states on the mainland and, therefore, did not assess the true impact of the gross income tax.

In fact, the consultants, in recommending that the general excise tax rate be increased from the current 4% to 4.5%, cite the observation that the current rate is less than the median rate of 6%. That might be true if one was comparing “apples to apples,” but the general excise tax has a much broader base – which even the consultants acknowledge. Anyone who has ever worked with the general excise tax knows that a comparable rate applied to a retail sales tax would need to be in the double digit stratosphere in order to generate the same amount of revenues that Hawaii’s 4% general excise tax rate generates.

Then there is the strategy the consultants would like to practice which every other “expert” has attempted to do and that is to “export” the tax burden to non-voting visitors. So the list of recommendations includes keeping the temporary transient accommodations tax rate at 9.25% and making it permanent. The consultants do not acknowledge that even the previous 7.25% rate generated substantial revenues because Hawaii has the second highest hotel room rates in the nation, out done by only New York which is not considered a leisure and discretionary destination like Hawaii. Nor do they acknowledge the fact that Hawaii, unlike most other states, imposes the 4% general excise tax on hotel room rentals when those states with retail sales taxes do not.

And, of course, they recommend raising the taxes on liquor and tobacco products, as this would shift the tax burden to visitors who consume the bulk of these products. What they don’t acknowledge is that shifting the burden to such a fragile part of the economic base puts the revenue picture at the mercy of visitor arrivals and visitor spending.

If the public believes the UH concert fiasco was a waste of money, then they should read the Tax Review Commission’s consultant’s report.

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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