The tax increases of the last few years have allowed state government to accumulate nearly a billion dollars in surplus funds. Now is the time for policymakers to think about ensuring Hawaii is ready for the next downturn.
Some legislative leaders realize that government has grown far beyond the ability of the state’s economy to support it. Lawmakers and administrators have made a case for higher taxes over the past few years because of the economic downturn. The revelation that state government is wallowing in substantial surpluses indicates there is absolutely no reason for maintaining these tax increases, which were enacted as temporary measures to close the budget gap.
Many of the increases were aimed at groups who either could not vote — the hike in transient accommodations tax on visitors for example — or those with higher incomes. In the latter case, there were increases in net income tax rates that put Hawaii on par with residents of California who pay the highest income tax rates in the nation, along with the loss of itemized deductions and the deduction for state income taxes paid.
While lawmakers may shrug their shoulders and say “too bad” for those rich people, these statistics have an impact on how Hawaii is perceived as a place to live, work, play, do business or invest. Without the investment of foreign-sourced capital, the economy of Hawaii, a capital-short state, cannot be sustained.
When juxtaposed against the mantra chanted a few years ago by advocates of the high technology investment tax and research credits that promised six-figure jobs — if those jobs were spurred on by the tax credit — it certainly seems hypocritical that the highest income tax rates are being imposed on those six-figure salaries. Why would anyone making such a salary want to come to Hawaii to work and pay those high tax rates?
Although the higher net income tax rates and the limitation on itemized deductions will be repealed after 2015, the loss of the deduction of state income and sales taxes is permanent. Although the state has a surplus of more than three-quarters of a billion dollars, those higher tax rates and the limitation of itemized deductions will continue for two more years.
While lawmakers point to the growing unfunded liabilities of the state’s health care costs for retirees and its pension obligations, it would appear unnecessary to continue imposing the higher rates and the suspension of the deduction for state taxes and the limitation on itemized deductions for higher income individuals. Lawmakers have already reversed themselves on the limitation on itemized deductions when many charitable organizations pointed out how that limitation prevented many individuals from making substantial charitable gifts. While such increases may have been justifiable as an interim means of shoring up the state general fund, they no longer can be justified given the swelling state coffers.
There is no doubt that those who like to spend surplus dollars on new programs and services will come up with new programs and projects to sate their constituents. There will be cries to restore this or that program or service that was cut during the economic and fiscal downturn. But lawmakers need to stop and ask whether or not those requests are truly critical to the health and safety of the community and whether or not those programs or services could be better delivered through the private sector. This is truly an opportunity to right-size government and put aside funds for a rainy day which is sure to come. Lawmakers must resist the temptation to spend and think about giving back to grow the economy.
Lowell L. Kalapa is president of the Tax Foundation of Hawaii.