"Tax the rich" not the answer

by Keli’i Akina, PhD, President, Grassroot Institute, April 2, 2021

Why do our legislators never remember that in the Robin Hood stories, the tax collector was a villain? 

Obviously they do not see themselves in that way, but there does come a time when increasing taxes can outweigh the benefits.

In the current situation, those leading the charge for more taxes say their goal is to make up for the losses in state revenues due to the COVID-19 pandemic and lockdowns. They also say their bigger tax hikes are aimed only at “the rich,” and the rest of us need not worry.

Yes, the state needs more tax revenues, but tax increases are the worst method for raising them. Just growing the economy would provide more revenue than the tax hikes being contemplated by the Legislature ever could. 

As for taxing the rich, Tom Yamachika, president of the Tax Foundation of Hawaii, this week called it short-sighted. Appearing on the latest episode of my “Hawaii Together” program on ThinkTech Hawaii, he asked rhetorically: 

“Do you really expect if somebody is wealthy and affected by a tax increase like that, [that] they are just going to sit down and take it?” 

In Hawaii, he said, 95% of all businesses are “not in corporate form,” and the owners will either pass the higher taxes onto their consumers in the form of higher prices, or, if that’s not possible, “they can get on a plane,” taking their businesses with them. Many doctors, who are not necessarily “rich” per se, have already done that, contributing to Hawaii’s severe doctor shortage. 

“Either way,” Yamachika said, “it spells trouble for the rest of us. If you put [the tax] into the price of goods and services, then more of us are going to feel the pain. If they get out of Dodge, it may take a little longer, but there will be fewer people to shoulder the cost of government services. If [the cost of those services] don't go down, then the cost for the rest of us is going to go up. That's just simple math.”

But simple math for some apparently is not so simple for others. As I write this, there still are several bills aimed at “the rich” moving through the 2021 Legislature. One is HB58, which started out as a plain bill about state funds but now is a dreaded “Frankenbill” that contains some of the worst parts from the now-dead SB56. 

Before public pushback effectively killed it, SB56 was proposing to increase the state’s top personal income tax rate to the highest in the nation. It also would have increased the state’s capital gains, corporate income and conveyance taxes and suspended numerous general excise tax exemptions. 

As part of its surgery on Frankenstein … er, HB58, the Senate Committee on Ways and Means jettisoned the income tax provision but inserted most of the rest of the SB56 measures, along with a provision that would lower the estate tax threshold. It’s a dangerous, awful bill, but the committee unanimously approved it yesterday, and it now goes for a full Senate vote.

Sad to say, even the jettisoned income tax hike might come back to haunt us. The Legislature’s “gut and replace” and “Frankenbill” shenanigans mean there still is time for our tax-hungry legislators to shove it into yet another bill.

Yamachika pointed out that politicians are worried about state employee furloughs, but they need to take a closer look at the closures and layoffs in the private sector. The coronavirus lockdowns have hurt businesses badly, and it wouldn’t take much more to push them over the edge. 

“Do we really want to hit them while they’re down?” he asked.

The fact is, there is simply no way to raise taxes — especially on the wealthy and job creators — and not have it affect the economy as a whole. Yamachika compared the state economy to an engine, saying taxes function like a brake: “Whenever you take out money from the economy, the place you take it out from is going to spin more slowly.” 

So what should state policymakers do to raise revenues? Yamachika said since Hawaii’s tax system is heavily dependent on businesses, his advice is simple:

“As much as possible, get out of the way of business.” 

Once the economy is stronger, he said, the state will be able to meet its budget without painful tax hikes or shortsighted tax policies. 

In other words, if we want to make Hawaii affordable and enable our legislators to put their budget house in order, we need to grow our economy and dispense with the myth that you can tax “the rich” without hurting everyone.

E hana kākou! (Let's work together!)

Keli'i Akina, Ph.D.

President / CEO