Don't rely on pennies from heaven

by Keli’i Akina, PhD, Grassroot Institute, January 8, 2021

Wishing and hoping are fine themes for a movie or a pop song. For a state budget? Not so much.

This week, we got our first real glimpse of Gov. David Ige’s proposed budget. During a legislative briefing on Monday, it was clear that the governor is trying to cope with the loss of revenues and economic woes that have accompanied the pandemic and lockdown. However, his method of doing so raises some concerns.

For example, while Ige deserves credit for trying to cut spending, we’re still a long way from a balanced budget. For the first time ever, the state is borrowing funds in order to meet its payroll. Can you really claim that you have a balanced budget when you’ve gone into debt to make the numbers add up? That’s a lot like charging the next few years’ worth of electric bills to your credit card, then telling your spouse that you’ve managed to balance the household budget.

Then there’s the problem of the state revenues. They are way down. And they will be for a while, until our economy rebounds. 

Faced with severely diminished income, the logical response would be to cut spending and pursue policies that would help local businesses and entrepreneurs thrive, such as those outlined in Grassroot Institute of Hawaii’s “Road map to prosperity.” That would be the most painless way to increase tax revenues without a tax hike. After all, when people make more money, so does the government, even without a higher tax rate.

Instead, the governor’s approach at the moment seems to be to make smoke and mirrors look like a sustainable, reliable “plan.” In his budget you can find $1 billion in “other revenues” spread out between fiscal 2023 and 2027. What revenues? No one seems to know, not even Ige’s team. When asked about the source of this magical $1 billion in badly needed revenues, no one was able to explain exactly where they are supposed to come from.

It’s probably safe to assume, however, that “other revenues” represent a yet-to-be-passed tax hike. Only last month the governor said he is considering tax increases in the coming year, and that is in addition to the automatic tripling of the state unemployment insurance tax, triggered by the state’s historically high unemployment rate.

It should go without saying that more taxes are the last thing we need right now. Already, Hawaii is notorious for its high cost of living and business-unfriendly tax and regulation policy. When you’re trying to rebuild your economy, making the state more expensive to live and do business in is a big step in the wrong direction.

Some policymakers are openly hoping that our fiscal salvation will come in the form of a federal bailout. While that is certainly a possibility, you can’t run a state budget by praying for a deus ex machina in the form of federal funds. At some point, the money will stop, be insufficient or come with too many strings. Then you’re left with all of the problems that you had before, only worse because they’ve been delayed. 

Not only that, who is to say federal dollars should be spent only on the government? Hawaii’s struggling residents and businesses might also be deserving of pennies from heaven. So the state should get its house in order without the need for helicopter funds.

Instead of relying on mysterious “other revenues” or delaying our problems by creating more state debt, we need to approach this problem with a sense of responsibility for future generations and the long-term fiscal health of our state.

We can start by creating a truly balanced budget with a meaningful spending cap. 

To cut spending, we can look for ways to privatize certain government functions, reduce ineffective subsidies and put a stop to big expensive projects that are unlikely to have an economic benefit; the Aloha Stadium project comes to mind. 

Then, we can focus on increasing revenues by pursuing policies that will grow business and entrepreneurship in the state.

We’ve spent years trying to put off the inevitable fiscal catastrophe caused by excessive spending. We need a new strategy that relies on realism and economic freedom instead of wishing and hoping.

E hana kākou! (Let's work together!)

Keli'i Akina, Ph.D.
President / CEO