Who Really Pays?

by Tom Yamachika, President, Tax Foundation Hawaii

Have you ever thought about who, really, pays the cost of something like a Lahaina wildfire or a Hurricane Iniki?

In the Lahaina wildfire case, victims are getting assistance from our federal and state governments. Some of them are trying to short-circuit the process by suing the government. Then the government is suing a private company, our electric utility. Some claimants are also suing private parties, such as owners of the properties that contained overgrown grass and brush which, according to the lawsuits, fueled the fire and should not have if the properties were maintained properly.

Who really pays for all of this, and how can the costs be minimized?

Let’s start with the utility.  Utilities work by providing a needed good or service (electricity has some characteristics of both goods and services, but that doesn’t matter) and spreading the cost for providing it among the people who want it.  And, because it is a private company, it needs to make a profit.  So, the costs that fall on the utility and the profit that it gets are, in theory, paid by its customers.

The utility, like other businesses and people, might have bought insurance.  If the insurance applies, then the cost that the insurer pays for is spread over a different set of buyers, namely other policy holders of the same insurance company.  And, of course, the insurer is a private company as well, so it also needs to make a profit.

To the extent that government pays the costs, it also spreads the costs over a set of people, namely taxpayers.  As we often say, “Governments don’t pay taxes.  Taxpayers pay taxes.”  But, at least in theory, there is no profit that is needed to run a government.  There are inefficiencies, however, which is what we write about often.  Inefficiencies include corruption, which some of our state politicians found out about when they received hefty federal sentences; and infighting, which costs a lot but produces little or nothing.  (Just look at what’s happening with the federal budget in Washington, DC, for multiple examples of infighting.)

The costs of fighting, attorney fees for example, are also a problem for individuals and businesses whether or not they are making a profit.

How do we lessen the overall cost of this tragedy to the ultimate bearers of these costs, namely us, as taxpayers and ratepayers and business customers?

First, we need to reduce the number of times that profits are mixed into the costs and expand to the extent possible the number of people who will be paying.

Second, we need to reduce or eliminate the costs of corruption, fraud, and related bad behavior.

Third, we need to get rid of the costs of fighting among ourselves relating to who pays the costs.

How about it, then, if we enact a law next session that says:  There will be a fund of $X.  People who lived in the affected area can take $x from the fund.  Businesses with a physical location in the affected area can take $y from the fund.  Government, the utility, and other people or entities who had responsibility for the tragedy need to pay into the fund.  Lawsuits won’t be allowed by or against contributors or recipients of fund money.  (This is somewhat like our workers’ compensation system.)  Anyone who submits a fraudulent claim or steals fund money gets thrown in the hoosegow without mercy.  In the legislative process, we work out how much is paid by whom.  There may be disagreements, but they should be resolved in one session and not over multiple years with judgments and appeals.

Maybe that will help all of us, who in one way or another are going to bear the costs of this tragedy.