by Lowell L. Kalapa, Tax Foundation of Hawaii

During the last session lawmakers hung their hats on a strategy that they hoped would help generate additional tax dollars without having to adopt an explicit tax increase like an increase in the general excise tax rate or an increase in personal income tax rates.

The strategy involved suspending nearly two dozen long-time exemptions from the general excise tax as a way to generate these additional dollars. Based on estimates made by the tax research and planning office of the department of taxation nearly two years ago when the idea was first floated, lawmakers believed they could realize up to $600 million over the fiscal biennium which would help to close the budget gap and allow continued funding for many programs.

After all, state spending had already been cut to the bone and many departments were hobbling along being able to provide just the barest of services. Crippled by furloughs and a mass exodus of civil servants who saw the possibility of diminished retirement benefits, the number of filled positions in state government has been shrinking over the past few years. In an effort to try to refill those positions, lawmakers sought the necessary funding probably not realizing that taking that money from businesses and taxpayers merely meant reduced resources for taxpayers, especially in a down economy.

Well, along comes the state’s Council on Revenues at their last meeting to forecast general fund tax revenues and they gave a skeptical eye to the estimates made by the tax department for the revenue impact of suspending those exemptions and they decided that those numbers were overly generous and unreasonable. So instead of adopting the $600 million estimate of increased revenues over the current and next fiscal year, they cut that forecast by nearly one-third to about $200 million per fiscal year or $400 million in additional revenues over the fiscal biennium.

While this will, no doubt, throw the proverbial monkey wrench into lawmakers’ financial plans, they can’t say that they were not warned that the forecasts made by the tax department weren’t very reliable. In fact, it was pointed out that the department’s numbers included revenues from taxing the sales of sugar from independent sugar growers, sugar growers who have not been around for nearly two decades. Another estimate made by the department pronounced that lawmakers would see additional revenues from taxing sales from petroleum refiners. Again, there has not been a petroleum refiner located in the state for nearly four decades as those petroleum refiners who provide products for Hawaii consumers are actually located in what is called a “foreign trade zone” which, under the federal program, is not considered to be located in the United States.

At the other end, tax research and planning officials estimated that suspending the exemption for ship repair and shipbuilding businesses reflected an industry that produces about $50 million in gross revenues. But when industry officials were questioned, they estimated their industry to be on the order of more than $100 million a year.

Further, because the measure that was approved by this past year’s legislature allowed businesses to be grandfathered in and continue to be exempt from the tax, so much for additional tax revenues. Not fair? Well lawmakers elected to grandfather those people in and, therefore, chose to forgo that revenue.

More importantly, as the legislature approaches another session that will be fraught with budgetary problems, they should be asking whether or not those numbers that come out of the tax department are reliable and, if not, what is the department doing about insuring the veracity of its research efforts?

True, a provision of the suspension bill does provide for the collection of information by the tax department to begin to get a handle on just how much of an impact those exemptions and exclusions have on general fund tax collections. However, the department is going beyond just asking how much of an exemption is being taken under those provisions of the law to the extent of gathering information about the number of employees, salaries and other data which seemingly is unrelated to the exemptions taken.

Perhaps this is partially a reaction to the criticism of the Act 221 tax credits which the department began collecting information on only after the horse was out of the barn door. Given that information goes far beyond the province of the tax department, it should perhaps be assigned to the department of business, economic development and tourism where the collection of that data would not raise the fear of an audit by the tax department.

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