Grassroot Testimony: SB 2599 (Relating to Taxation)

To: Senate Committee on Education
Sen. Michelle Kidani, Chair
Sen. Breene Harimoto, Vice Chair

From: Grassroot Institute of Hawaii
President Keli’i Akina, Ph.D.

Comments Only

Dear Chair and Committee Members:

The Grassroot Institute of Hawaii would like to offer its comments on SB 2599, which would increase the general excise tax from 4% to 5% and deposit that revenue into a special account for department of education operations.

At a time when leading education reformers are looking to move away from central control of education and empower parents, principals, and local schools, the impetus behind this bill shows us the exact opposite—a dedication to centralized control of schools, a one-size-fits-all education policy, and the further bureaucratization of the state’s education system. That a massive 25% increase in the general excise tax is envisioned as the method by which to accomplish these aims only adds insult to injury. Thus, the state’s businesses, entrepreneurs, and disadvantaged are being asked to bear the greatest financial burden in funding a plan that shows little promise of fixing our state’s education ills, but every possibility of handicapping it economically.

The most recent edition of the ALEC-Laffer State Economic Competitive Index[1] ranks Hawaii last among all states for its sales tax burden, a rating that significantly contributes to a mediocre economic outlook ranking. In a similar way, the Small Business Policy Index[2], which compares state policies and costs related to small business and entrepreneurship puts Hawaii at a dismal 47th, thanks largely to our high consumption taxes. In the same survey, Hawaii was ranked 50th in a ranking of states by sales, gross receipts, and excise taxes. Moreover, at least one study of OECD countries has found that along with corporate and personal taxes, consumption taxes like the state excise tax can be economically harmful over the long-term.[3]

In fact, economic theory recommends using consumption taxes like the excise tax as a way to influence consumer behavior and discourage purchase or use of the product taxed. A report from Deutsche Bank making recommendations to boost economic growth in Europe following the financial crisis posits that ideally any increase in a consumption tax would be offset by no more than an equal decrease in demand. (For our purposes, that means we would hope that a 1% surcharge would cause no more than a 1% drop in demand, purchases, or revenue.) However, as the author of the report concludes, “this result is based on strong assumptions that make realistic implementation impossible”[4] In other words, the inevitable effect of raising the excise tax is to discourage consumption, and any realistic model has to account for the probability that an increase in revenue will be offset by the possibility of a greater decrease in consumption.

Given that the state depends heavily on the excise tax as its revenue source, these continued efforts to tack on surcharges for various projects (no matter how worthy) threaten to kill this particular golden goose. As the Grassroot Institute noted in its multi-year budget analysis,[5] the Council of Revenues has predicted only a 1% increase in revenue growth in 2018, followed by a 2% growth rate thereafter. This can be contrasted with historical spending growth that more than doubles that rate, leading to a widening budget gap. Increasing the tax rate may have short-term benefits, but threaten a long-term slowdown in overall state revenues.

Though the GET does affect local businesses, they are not the only ones burdened by the excise tax. A study from the Institute on Taxation and Economic Policy (ITEP) criticized Hawaii for its regressive taxation practices, ranking it the 15th unfairest tax system in the country. The GET in particular came under criticism as falling particularly heavily on those least able to afford it. According to ITEP, payment of sales and excise taxes takes up an average of 11% of family income for the poorest 20% of earners.[6]

Hawaii’s public schools currently have a $1.9 billion dollar budget, 81% of which is comprised of state funds,[7] while in FY 2013, K-12 education spending represented 15.5% of total state expenditures—the second highest category after the catch-all “other expenses.”[8] At every level, data demonstrates that spending alone is not the panacea that can solve our education problems.[9] What are needed are innovative solutions that break out of the stale, centralized approach that has characterized our approach to this point, not more of the same.

Thank you for the opportunity to submit our comments.

[1] Available at http://www.alec.org/app/uploads/2015/10/RSPS_8th_Edition-Final.pdf.

[2] Available at http://www.sbecouncil.org/wp-content/uploads/2014/12/SBPI2014Final.pdf.

[3] Norman Gemmell, Richard Kneller, & Ismael Sanz, The Timing and Persistence of Fiscal Policy Impacts on Growth: Evidence from OECD Countries, 121 Economic Journal F33-F58 (2011).

[4] Frank Zipfel and Caroline Heinrichs. The Impact of Tax Systems on Economic Growth in Europe, Deutsch Bank Research, Oct. 5, 2012. Available at http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000295266/The+impact+of+tax+systems+on+economic+growth+in+Europe%3A+An+overview.pdf

[5] See http://new.grassrootinstitute.org/2016/01/state-of-the-state-budget-2016/.

[6] See http://www.itep.org/whopays/states/hawaii.php.

[7] Hawaii State Department of Education website, available at http://www.hawaiipublicschools.org/ConnectWithUs/Organization/Budget/Pages/home.aspx

[8] Ballotpedia. “Hawaii State Budget & Finances.” Available at https://ballotpedia.org/Hawaii_state_budget_and_finances

[9] Johnson, Kirk A. & Krista Kafer. “Why More Money Will Not Solve America’s Education Crisis.” The Heritage Foundation. (June 11, 2001) Available at http://www.heritage.org/research/reports/2001/06/why-more-money-will-not-solve-americas-education-crisis

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