The easiest way to increase tax revenues

Hawaii’s state budget is in a precarious position.

It’s a startling reversal of where we were at the beginning of the year, when the state had a huge surplus and many of our lawmakers were going hog-wild trying to spend it all.

In June, I praised Gov. Josh Green for cutting $1 billion from the Legislature’s spending plans, but what remained still exceeded the state spending cap.

To the governor’s credit, he has been squirreling away money into the state’s rainy day fund. But still, the budget is teetering because of overspending.

Now, a sluggish economy threatens to throw off the balance even more. If state spending continues to increase and tax revenues stay flat, the state will operate at a budget deficit with only the carry-over surplus to keep us from falling completely into the red.

The state Division of Budget & Finance is forecasting increased tax revenues in 2025 and beyond, but it would be foolish to assume that nothing else could occur to affect tax revenues. Obviously, no one expected wildfires to almost completely burn down Lahaina in August. And yet, that tragedy happened and has resulted in growing expenses.

Unfortunately, when faced with a negative economic outlook and continued excessive spending, many of our state lawmakers will be tempted to increase our taxes rather than trim their expenses.

Historically, that hasn’t helped. It’s why tiny Hawaii has one of the biggest tax burdens in the entire nation — and of course, also the nation’s highest cost of living.

If our lawmakers have any interest in lowering Hawaii’s cost of living, improving its business climate and stemming the exodus of residents to the mainland — as they should — I suggest they consider something different: Cut taxes and watch our economy grow.

It sounds counterintuitive, but there is actually lots of evidence that tax cuts can result in economic growth. And more economic activity means more tax revenue.

In 2021, the national Tax Foundation listed seven recent studies that linked tax cuts to economic growth. It said some of the studies noted that “the strength of this effect depends on which taxes are cut, for whom, and when.”

But no matter how you do it, cutting taxes would leave more money in the hands of Hawaii residents and businesses, which would encourage investment, innovation, job growth and consumer spending.

Increased business activity would mean more transactions and profits available for taxation. In effect, the state would collect more money with lower taxes because it’s dealing in bigger numbers — like how Walmart can make a lot of money with low prices by selling in bulk.

As for which taxes to cut, I suggest first our sky-high income taxes. If lawmaker’s won’t cut the rates, they could at least peg the brackets to inflation, as Gov. Green proposed during the 2023 legislative session. Doing so would prevent Hawaii taxpayers from being pushed into higher tax brackets simply because of inflation, which is something none of us in Hawaii has any control over.

I also would like to see Hawaii’s estate tax and corporate income taxes reduced or abolished. Such action might cost money in the short run, but would pay big dividends down the line through higher investment and economic growth.

There are many other taxes we could consider reducing or eliminating, but it should be obvious by now that continually increasing our tax burden is a losing proposition.

Let’s try cutting taxes to produce a stronger economy and reduce out-migration — and produce more tax revenue to fund the necessary functions of our state and county governments.

This commentary was Keli‘i Akina’s weekly “President’s Corner” column for Dec. 9, 2023. If you would like to have his columns emailed to you on a regular basis, please call 808-864-1776 or email info@grassrootinstitute.org.

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