by Lowell L. Kalapa, Tax Foundation of Hawaii

In kicking the proverbial can down the road, Congressional leaders acquiesced to the demand that wealthier Americans pay higher taxes. The higher taxes came in the form of a higher maximum tax rate on those individuals making more than $400,000 and the loss of the favorable tax treatment accorded dividend and capital gains income.

Such a strategy pandered to the majority of Americans who don’t believe they are “rich,” but fall into the great “middle class” which the politicians claimed they were protecting. In the meantime, those very politicians have deferred dealing with the real issue that is out of control and that is spending by the federal government. That out-of-control spending does not stop at the federal doorstep as the same can be said for state and local governments across the nation as many states and municipalities teetered on the edge of financial disaster during the recent recession.

While many an elected official would like to blame the economic downturn for their budget struggles over the last few years, one has to take that with a grain of salt. Looking back, most, if not all, of those state and local governments that suffered the greatest financial shock in recent years are those that had overextended themselves, adopting new programs and services in hopes a growing economy would produce the revenues to sustain those new or added programs and services. When the economy turned, so did the fortunes of those state and local governments. Especially hard hit were local governments that are almost solely dependent on the real estate market. As housing values sank because homeowners owed more than their homes could command on the market, so did the real property tax base which produced those property tax revenues.

As folks lost their jobs because consumption began to fall as others also lost their jobs, so did the fortunes of the net income and sales taxes. Rising unemployment meant people weren’t earning a paycheck, a paycheck that produced income taxes and a paycheck that put disposable income into the hands of consumers. This did not escape the notice of the wealthy taxpayer who has the discretionary income to invest and provide capital to companies, or for that matter, owners of companies who grew skeptical of how government leaders were going to address the economic recession. So instead of investing and putting capital back into companies and businesses, those investors sat on their money waiting for government to send a signal that it had a firm direction on where to take the economy. Instead, government reacted with more regulations to “protect” the average taxpayer.

Regulations to investors are nothing more than another tax as those regulations impose additional costs on the taxpayer who must then comply with the myriad of new regulations. As a result of the backlash to the banking debacle and distrust of the financial system, government imposed new, and what many believe are unreasonable, regulations on the banking industry which, while aimed at the large culprits that were implicit in the banking debacle, fell largely on smaller institutions including hometown banks and member-run credit unions. The long and short of it was that while political leaders wrung their hands on how to “fix” the economy, the very safeguards they adopted also managed to trip up economic recovery.

Here in Hawaii, elected officials desperate to make-up the budget shortfall selectively raised taxes, resorting to increases that weren’t visible to the general public in order to avoid mass resentment on the part of the voting constituency. Regardless, those tax increases stand in the way of economic recovery. Although the administration and lawmakers would like to believe economic recovery has arrived because the visitor industry is rebounding, that recovery is still subject to the whims of the national and global economy. If Hawaii’s economy is to truly rebound and stabilize, it must attract capital and new investment. However, to do so, elected officials must begin to address the high cost of living and doing business in this state.

With the highest maximum personal income tax rates, rivaled only by California, one of the highest combined state and local tax rates on fuel, the only double digit “sales” tax when Hawaii’s 4% general excise tax rate is converted into a comparable sales tax rate, motor vehicle taxes that rival most other states with high vehicular taxes, some of the highest tax rates on the “sins” of alcohol and tobacco, and the plethora of user fees and charges which seem to grow year by year, there is no wonder why no one wants to do business in Hawaii and for those who are here, there is no wonder why so many are throwing up their hands and calling it quits.

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