Time to Ease the Tax Burden to Allow Economy to Prosper

by Lowell L. Kalapa, Tax Foundation of Hawaii

Now that everyone is aware that the tax increases of the last few years have allowed state government to accumulate nearly a billion dollars in surplus funds, it is time for policymakers to think about insuring that Hawaii is ready for the next downturn.

There is no doubt that some legislative leaders have come to realize that government has grown far beyond the ability of the state’s economy to support that government. While lawmakers and administrators may have been able to make a case for higher taxes over the past few years because of the downturn in the economy, both nationally and locally, with the revelation that state government is now wallowing in substantial surpluses, there is absolutely no reason for maintaining the tax increases enacted as temporary measures to close the budget gap.

Many of those tax increases were aimed at specific target groups who either could not vote - as is the case of visitors with a hike in the TAT or hotel room tax - or those with higher incomes. In the latter case, there were increases in net income tax rates that put Hawaii on par with residents of California who have to deal with the highest income tax rates in the nation, along with the loss of itemized deductions and the loss of the deduction for state income taxes paid. While the latter net income tax provisions don’t affect the majority of island residents, it is noted by observers across the nation, if not around the world, as a measure of how Hawaii treats its taxpayers, creating a negative perception of Hawaii.

While local lawmakers may shrug their shoulders and say “too bad” for those rich people, these statistics have an impact on how Hawaii is perceived as place to live, work, play, and more importantly, as a place to do business or invest. Without the investment of foreign sourced capital, Hawaii’s economy can not be sustained as it has long been acknowledged as a capital short state. Put more succinctly, if I give you a dollar today for your product and you give me the same dollar tomorrow for my product, neither of us is better off than we were two days ago. Only when someone brings a dollar from outside the state do both of us do better as it is a dollar more than either of us had two days ago.

When juxtaposed against the mantra chanted a few years ago by advocates of the high technology investment tax and research credits that promised high paying six-figure jobs - if those high technology jobs were spurred on by the tax credit, it certainly seems hypocritical that the highest income tax rates are being imposed on those six-figure salaries. Why would anyone making a six-figure salary in the high technology area want to come to Hawaii to work and pay those high tax rates on his or her salary?

Although the higher net income tax rates and the limitation on itemized deductions will be repealed after 2015, the loss of the deduction of state income and sales taxes is permanent. Although the state has a surplus of more than three-quarters of a billion dollars, those higher tax rates and the limitation of itemized deductions will continue for two more years.

Although lawmakers continually point to the growing unfunded liabilities of the state’s health care costs for retirees and its pension obligations, it would appear unnecessary to continue imposing the higher rates and the suspension of the deduction for state taxes and the limitation on itemized deductions for higher income individuals. Lawmakers have already reversed themselves on the limitation on itemized deductions when many charitable organizations pointed out how that limitation prevented many higher income individuals from making substantial charitable gifts. While such increases may have been justifiable as an interim means of shoring up the state general fund, they no longer can be justified given the swelling state coffers.

There is no doubt that those who like to spend those surplus dollars on new programs and services will come up with new programs and projects in order to sate their constituents. There will be cries to restore this or that program or service that was cut during the economic and fiscal downturn. But lawmakers need to stop and ask whether or not those requests are truly critical to the health and safety of the community and whether or not those programs or services could be better delivered through the private sector. This is truly an opportunity to right-size government and to put aside funds for a rainy day which is sure to come. Lawmakers must resist the temptation to spend and think about giving back to grow the economy.

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