October 3, 2012
On Sept. 11, the Tax Review Commission 2010-2012 held a public hearing at the state Capitol to allow public testimony on reports the commission will examine before issuing its final report in December.
The two reports open for comment were the “Study of the Hawaii Tax System” and the study on “Selected Issues with the Hawaii General Excise Tax,” by the Public Financial Management (PFM) Group and Dr. William Fox, respectively.
The vast majority of the oral and written testimony was critical of the PFM report. This opposition included lawmakers from both sides of the aisle, accountants, bankers, nonprofits, Realtors, private individuals, members of the building, construction, and tourism industries and the Tax Foundation of Hawaii.
The commission engaged the PFM Group to examine the tax system in Hawaii. In the course of its evaluation, PFM developed a model that projected state revenues and expenditures through fiscal year 2025, assuming current government services and programs were maintained. Based upon this model’s projections, PFM felt that the current revenue structure would not be able to meet the financial needs of the state and would therefore require new or expanded sources of revenue.
In short, PFM developed and recommended a shopping list of ways for the state to make more money. Most of these recommendations were tax increases and looked like incentives for legislators to grow government during bad economic times.
A major legal flaw in the report was that the commission was supposed to evaluate and make recommendations on the state’s tax system. However, the PFM report forecasts state services and expenditures and could be treated as targets or goals, emboldening the “tax and spend” members of the government, including the governor, to pursue future actions or justify favored tax increases.
While the PFM report makes numerous tax increase recommendations, four of them stand out. These include the recommendation to increase the general excise tax (GET) rate from 4.0 percent to 4.5 percent (on Oahu this would be an increase from 4.5 percent to 5.0 percent), implement income tax on pension income, increase the corporate income tax rate, and eliminate the deduction for property taxes paid.
In light of the state of Hawaii’s economy and the significant cost of living faced by residents of the state, these tax increase recommendations are quite troublesome.
More specifically, the GET already places a large burden on all people, but because it is so regressive, any increase will adversely affect the poor and elderly on fixed incomes.
Additionally, the state already tried to tax pension income during the 2011 session when (now retiring) Rep. Barbara Marumoto engaged in a verbal battle with the governor by stating that his tax proposal was an “almost cruel and unfair tax that targeted the elderly.” That exchange became etched in the minds of the electorate and the measure failed to pass.
Lastly, the business climate in Hawaii already makes it tough for companies to do business. The PFM proposal to increase the corporate income tax rate would make it that much tougher for them to thrive, make it tougher to attract businesses and further hinder the state’s economic recovery.
While the PFM report explains ways to increase state revenue, it should have been more than just a shopping list of taxes that legislators had already considered and rejected in the past. I believe more intellectual rigor was needed in the PFM report to be taken seriously by legislators. The Legislature knows very little about tax credit policy and this would have been a good opportunity to enlighten legislators about solar, photovoltaics and high-tech credits and their burdens or blessings on our state budget. Instead, there was little new information in the report except the usual laundry list on how to tax the people of Hawaii.
In the strong and succinct words of Lowell Kalapa of the Tax Foundation of Hawaii, this report, which cost taxpayers $100,000, was “a waste of money.”