Best way to generate taxes is through economic growth

If Benjamin Franklin had ever seen the Hawaii state budget, he’d have changed his famous quote to say that the only two things certain in life are debt and taxes.

Especially these days, it’s as if local policymakers can think of nothing else to help Hawaii come to terms with the economic fallout of the coronavirus lockdowns — except maybe furloughs.

Gov. David Ige has estimated that two-days-a-month furloughs for state employees will save $300 million a year over the next four years to help cover the state’s massive $1.4 billion deficit. It’s a plan open to criticism, but the sad fact is that there are no easy answers in this situation.

From the moment the lockdowns started, the Grassroot Institute of Hawaii cautioned they would have a devastating effect on state revenues. As workers in the private sector watched businesses close and jobs disappear, we warned that government employees would eventually be affected as well.

Now that time has come, and it’s a terrible thing that state employees are seeing their jobs trimmed back. But as bad as things are, state employees will suffer even more if the state can’t meet its financial obligations.

As it is, we are accumulating liabilities at a worrisome rate. For the first time ever, the state in October borrowed to cover its payroll. Moreover, the $747 million loan is supposed to be repaid within just five years.

The governor also suspended the state’s legally required annual payment to the Employers-Union Trust Fund, which provides health benefits to government employees and retirees. This means the fund’s already dangerously high unfunded liabilities will increase, putting its beneficiaries further at risk. As a result, the state’s credit rating was downgraded, ensuring that future state borrowing will be more expensive.

Beyond that, the state’s leading private industry, tourism, has tanked; tax revenues have evaporated; we have depleted the state surplus; and the state budget is likely to remain in tatters for years to come.

When the government manages to get itself into this kind of a pickle, there aren’t many choices left. It can either tighten its belt or find ways to increase revenues.

To its credit, the Legislature did manage to trim $772 million from the governor’s proposed fiscal 2021 budget, which otherwise would have exceeded the state spending cap. But more cuts are needed. Instead, we’re starting to hear hints of new taxes — and from the governor, no less. In a recent Civil Beat interview, Ige made it clear he is open to any new tax schemes state policymakers might wish to propose, and “I’m contemplating a couple of things myself, just to make everything work.”

Needless to say, but I’ll say it anyway, higher taxes are the last thing we need right now. Not only would they increase the cost of living during an economic downturn, they would cripple the ability of the state to revive our struggling economy.

The most frustrating thing about this budget gap is the fact that it didn’t have to be this way. According to recent research by the Grassroot Institute, Hawaii lawmakers since 2012 have exceeded the state spending cap by $1.4 billion — about the same amount as our current budget shortfall. Also since 2012, the state has launched numerous spending programs and added thousands of employees to its payroll.

The currently ineffective state spending cap is found in the Hawaii Constitution. It was intended to limit general fund expenditures to the estimated rate of growth of the state’s economy, as measured by the average growth in personal income. That limit can be bypassed by only a two-thirds vote in the Legislature. But over the past decade, only one legislator ever dissented: Sen. Sam Slom, and he’s been out of office since the end of 2016.

What we need now is a state spending cap with real teeth. Colorado, for example, requires any budget that would breach the state’s spending cap to be put to a public vote. Not surprisingly, its cap is rarely exceeded, and its state budget and economy usually are quite healthy.

But more than a strong spending cap, Hawaii needs to change its entire approach to state finances. If we want a healthy economy ourselves, we need to stop incurring debt, continue to reduce spending and lay off the taxes. Contracting more with the private sector also would help cut expenses.

To generate more taxes, the best option would be to encourage greater private economic growth: improve Hawaii’s business climate, increase opportunity, remove disincentives. Let Hawaii residents and businesses get back to work. Higher tax revenues will flow soon after.

This is the road map prosperity our policymakers should be following. If they don’t, expect more pain in the years ahead than just state employee furloughs.

(Note: The Dave Swann cartoon at the top of this page is from January 2019. Apparently for some, the allure of tax hikes never gets old, no matter how bad the circumstances.)

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