Tax Talk/Tax Action #3

This article was originally published here on Hawaii Reporter.

Hawaii is overtaxed and overregulated, a threat to our growth, our prosperity, and the self-reliance of our citizens. We at Grassroot Institute of Hawaii believe in citizen responsibility. We expect a dialogue with our readers. How do we best get the word out to politicians and opinion leaders? We seek your creativity. Simply talking about taxes among ourselves gets us nowhere. We must find ways to broaden our message and act to change the political status quo. Come on readers! Get involved! What should we do? How should we do it? The future of Hawaii depends on all of us! (For more Tax Talk, visit our website at GrassrootInstitute.org.)

Consultant Recommends Massive Half Billion Dollar Tax Increase To Hawaii Commission

KITV News did a good turn for Hawaii taxpayers recently by alerting us to a report advocating state tax changes that would increase revenues by $481 million in the first year after enactment. Earlier this year, Hawaii Tax Review Commission engaged the PFM Group, a mainland consultant on state tax policy, to assess the sufficiency of revenues from the current system, consider alternate tax structures, and make recommendations for any needed changes.

Our state constitution requires the appointment of this commission once every five years to evaluate “the state’s tax structure, recommend revenue and tax policy, and then dissolve.” (Article 7, Section 3). The enabling statute directs the commission to “conduct a systematic review of the state’s tax structure, using such standards as equity and efficiency.” (Chapter 232E-3). Nowhere in constitution or statute will you find any suggestion that the commission should consider the overall adequacy of revenues, as this depends on legislative spending decisions, well outside the purview of this temporary commission.

The 2010 commission started late, as Governor Lingle appointed only 2 of the 7 members before she left office. The remaining five members, including the Chair and Vice Chair, were appointed by Governor Abercrombie. The commission began its work in 2011. Given the well-known policies of the Abercrombie Administration, it should come as no surprise that his hand-picked commission selected a consulting organization that ended up recommending tax hikes that would increase revenues by nearly 10%–and that a pension tax would be part of the mix. The Chair of the commission is Randy Iwase, a well known local political figure. The other six members include two bankers, two lawyers, and an accountant. Commission minutes reflect attendance by lobbyists from various interests.

If this temporary commission is now to consider revenue adequacy, which depends on spending decisions, you might wonder why the legislature did not also establish a companion committee to consider expense savings. Spending on current programs amounts to around $5 thousand for every man, woman, and keiki residing here in paradise. PFM expressed its attitude to expense control as follows: “It is unlikely that the challenges facing the state can be solved with approaches that only focus on expenditures…. Meanwhile, the pension and OPEB obligations for current retirees are inescapable and will grow throughout the period of this analysis. Coupled with expected growth in key areas like health care, the expenditure side of the state budget will pose many challenges in the years to come.” In other words, we really can’t modify the expense tune, so the taxpayers once again will be milked (excuse the mixed metaphor) to pay the piper. Aloha! means say goodbye to your money.

PFM ran a number of scenarios covering views of how well the tax baseline (current law) would cover expenses, by year up to 2025. It is certainly true that revenues are unlikely to cover spending if we don’t reduce spending. PFM showed the alarming shortfalls involved if the state accounted expenses on an accrual rather than cash basis. The mostly unfunded retiree pension and health care obligations result in huge budget imbalances. It is unlikely that even the massive increases recommended by PFM would resolve that problem. You can expect that the legislature will spend PFM’s additional revenues in new programs and increased payoffs to the public employee unions. A new money tree resulting from the supposedly disinterested work of a hand-picked commission and its consultant!

Here are the important tax increases, along with the additional revenues in the first year:

Increase the GET to 4.5% (that would be 5.0% onOahu): +$350 million

Tax pension income for taxpayers reporting over $50 thousand AGI: +$166 million

Restore the surcharge on rental cars: +$65 million

Make corporate income tax a flat 9% rate: +$35 million

Eliminate the property tax deduction: +$25 million

Increase cigarette and alcohol taxes: +$12 million

If you are surprised that PFM doesn’t advocate raising individual income tax rates, even PFM recognizes that Hawaii ties for highest marginal rate at 11% and that the brackets yield very high rates at very low levels of income. Actually, PFM recommends more “tax equity” by exempting the first $20 thousand AGI from the income tax (a reduction of $17 million), and by doubling the low income food credit (a reduction of $20 million). PFM also recommends eliminating the 0.5% GET on business to business transactions. This is actually sensible since taxes on such transactions constitute double taxation, and larger businesses can organize to avoid them while smaller businesses cannot do so. Still, this will reduce revenues by $135 million, and it will be interesting whether this part of the program actually makes it into the final legislative proposal.

The net result of the proposed changes = $481 million.

PFM notes that strengths ofHawaii’s tax structure include “insulation from cross-border competition issues” and “ability to export a significant share of the state tax burden.” We can’t escape, and our tourists will willingly allow us to continue socking them with ever higher taxes. PFM also notes our economy’s dangerous dependency on tourism and federal installations, and the minuscule role played by manufacturing inHawaii(only 2% of Hawaii’s GDP compared to over 12% of countrywide GDP). While we may not be able to escape taxes by doing business across the border (our border is two thousand plus miles of ocean), why would new businesses want to diversify our economy by locating here in the face of high taxes, huge unacknowledged state liabilities, and the Jones Act?

If history is any guide, you can expect our governor and legislature to push for these or similar massive tax increases once the elections are safely behind them. The only way to avoid this is at the ballot box in November. We have our warning—and time to react to it! Ask your senator and representative what their position is on state tax adequacy. No matter how great a guy or gal your legislator might be, or how little you know about (or even how much you personally dislike) his opponent, vote against anyone who really believes we are not taxed enough already. And if the opponent doesn’t get the message, vote him out too at the next election.

Keep voting them out until fiscal sanity finally prevails. The economic future of Hawaiidepends on you.

Stephen Zierak, CPCU/ARM, graduated from Boston University with a BA in Political Science in 1969. After a forty year career in property casualty insurance underwriting, Mr. Zierak retired as a Vice President of Swiss Re America in 2010. At that time, he relocated to Hawaii, a move he had always wanted to make, but had delayed due to lack of appropriate professional opportunities here. Mr. Zierak plans to continue his studies in Political Science, never really abandoned even during his professional career, and to write on matters of public policy. Recently, he produced for Grassroot Institute summaries of Hillsdale’s ten part internet course on our Constitution. Stephen Zierak is married to the love his life, Teodora, and they reside in Honolulu.

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