Helping Hawaii to Help Itself

by Lowell L. Kalapa, Tax Foundation of Hawaii

Now that Hawaii no longer has seniority influence in Washington, political observers have been trying to assess the impact that the loss will have on not only on state and county fortunes but also on the stability of Hawaii’s economic future.

Without someone who can deliver the bacon for Hawaii, those observers believe that the federal largesse for Hawaii will diminish quickly over the next year. Gone will be all of those earmarks of federal funds for this or that program, large appropriations for defense expenditures, and hundreds of millions of dollars for research grants and native Hawaiian programs. With years of seniority, the Congressional delegation could direct funding to Hawaii without question as support was garnered from those who also wanted handouts of federal funding in exchange for their support.

But, obviously, that will not be the case for a very long time as our young Congressional delegation will take years to gain seniority. Thus, the bottom line is that Hawaii stands to lose millions, if not billions, of dollars it has come to expect flowing from the Potomac to Waikiki Beach. Without those federal dollars, one has to wonder what our state economy will look like in a few short years.

As a result of being the beneficiary of such generous bounty from the federal government, Hawaii really has not had to face head on the fact that it is a poor place to do business. Public policymakers didn’t have to worry about business failures as there were always federal dollars to shore up a stumbling economic malaise. Those federal dollars plugged the “pukas” or shortcomings created by bad public policy and a plethora of government regulations that has made it costly and complex to do business in Hawaii.

Even now as we watch hotel occupancies rise and room rates recover to their pre-recession levels, hoteliers decry the fact that they are still not making money as the cost of doing business in Hawaii has reduced whatever profit margin they can realize to a razor-thin layer of the revenues they receive. Mirroring this wave of gross revenues are the state’s general excise tax collections which are the tax on gross income received. But again, that is a tax on the gross receipts of all businesses in Hawaii and does not reflect the costs incurred in producing the goods or services sold. On the other hand, corporate income tax collections continue to muddle along reflecting the fact that businesses are still trying to recover from losses incurred in the past three years.

Meanwhile, personal income tax collections seem to be racing ahead with a pace of 11.3% growth over collections of the last fiscal year. However, come 2013, it is expected that personal income taxes will take a hit as taxpayers begin to claim the generous solar tax credits. Collections are expected to drop by three to four percentage points as the refundable credit is claimed.

So the state will face a double whammy with the loss of the seniority in Congress and a poor business climate that cannot be bailed out with further infusions of federal aid. So what are local policymakers to do? If nothing else, local elected officials need to go back to the problem that has plagued the state since its admission as a state, improving the business climate. That means getting government out of the way, reducing and/or eliminating unnecessary regulations, streamlining the permitting process, and reforming the workers’ compensation laws. While it might be wishful thinking that lawmakers reduce the taxes already imposed, they should pledge not to increase the burden of taxes by either increasing rates or finding new ways to raise money.

Of course, this means that they must bite the bullet and reduce the number of programs and services government provides, scaling back government to only the truly essential services needed to preserve the health and safety of the community. While there will be constituents who may complain that the government will no longer provide a program or service, elected officials need to do a better job of juxtaposing the cost of those services against the need to raise more revenues with an increase in taxes.

The hard reality is that Hawaii can no longer be expected to be bailed out with an infusion of federal funds and elected officials must now face the hard reality that Hawaii must become more business friendly as it is businesses - entrepreneurs - who will create the jobs we need in the future. If Hawaii continues to remain hostile toward private entrepreneurship, then we call can kiss Hawaii’s future good-bye.

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