Should sacrifices go just one way?

by Keli'i Akina, Ph.D., President/CEO Grassroot Institute, August 27, 2022

We are often told that citizens have a duty to make sacrifices and cooperate if we want to make Hawaii better. It’s all part of being “in the same canoe.”

But what about the government? Does the state have a responsibility to “go without,” if that would be better for the people?

Should sacrifices and cutbacks go in only one direction?

This isn’t just a rhetorical question. As inflation pushes prices higher, the calls for tax relief are growing louder. One of the most popular proposals is a general excise tax exemption for food and nonprescription drugs. Private practice physicians and the Grassroot Institute of Hawaii have also been urging a GET exemption for medical services.

The rationale behind the GET exemptions is simple: Food and medical-related expenses are necessities, and the government should not levy taxes on things that are needed for basic health and survival.

In the case of food and nonprescription drugs, exemptions would provide some relief from Hawaii’s high cost of living. In the case of medical services, an exemption could make it easier for doctors in private practice to stay in business and thus help mitigate the state’s critical doctor shortage.

Some people, however, oppose these types of exemptions — and not because they lack sympathy for others who are struggling to survive in Hawaii. Instead, they worry that the exemptions would result in — yes — lower tax revenues.

If we implement such exemptions, they ask, how will the state make up the lost revenues?

Well, this is simply putting the cart before the horse. Before trying to come up with new taxes to offset the proposed tax cuts, we should look at how much money the state is already bringing in.

In fiscal 2021, state lawmakers grabbed the counties’ share of the transient accommodation tax in anticipation of a big drop in revenues because of the coronavirus lockdowns. Since then, the state has actually been operating in surplus territory.

For fiscal 2023 alone, state general fund revenues are expected to be about $464 million greater than in fiscal 2022, according to the state Council on Revenues.

In July, state Tax Director Isaac Choy estimated a GET food exemption for groceries would cost the state about $268 million in lost revenue. In December 2006, the 2005-2007 Tax Review Commission estimated that exemptions for not only food and healthcare but also clothing and shelter would cost the state treasury about $501 million

In other words, the state’s revenue increase in 2023 could be almost enough to accommodate any “lost tax revenue” from GET exemptions for food and healthcare, and maybe even clothing and shelter as well.

But what if, hypothetically, the state wasn’t expecting an infusion of excess tax revenues? Would that negate the need for a GET exemption?

No, because the argument over the exemption is not about what the government needs, but what the people need.

In this case, that need is strong enough that lost tax revenues alone should not be enough to end the discussion.

In January 2020, a Grassroot Institute of Hawaii study estimated that excise tax revenues on for-profit healthcare spending in Hawaii amounted to about $222 million annually. It also calculated that an exemption for medical services would result in about a $1.4 billion increase in economic activity across multiple industries, and produce about $64 million in new GET collections.

Thus, in the case of a GET exemption for medical services, the state “loss” in tax revenues would amount to only $158 million. Out of an annual state budget of about $15 billion, that’s not much. It’s roughly the same amount that is allocated in the 2023 budget for “Major Pavement Improvements, Statewide.”

It’s not hard to imagine that Hawaii’s lawmakers would be willing to spend $158 million in state funds in order to lower the cost of healthcare and address the doctor shortage. Is it really asking too much for them to not spend the same amount to accomplish the same goal?

Too often, Hawaii policymakers believe that the answers to our state’s woes lie in new government programs and spending millions of more tax dollars. They are usually more than happy to suggest that Hawaii taxpayers underwrite such projects for the greater social good.

But sometimes, the solution lies in doing less. Repeal regulations instead of creating new ones. Cut taxes instead of hiking them. In such situations, the government should do the right thing and make the necessary sacrifices.

Luckily, it looks as though this will be a moot point in the coming years, as the state is well able to afford the exemptions — any or all of them — due to booming revenues.

But even if it meant making a few spending cuts, the principle at stake — and the good that could be accomplished via exemptions — is still compelling.

These are exemptions that could help make Hawaii more affordable while addressing a major issue in healthcare access. That’s reason enough to make a few budgetary sacrifices.