Impact of high taxes cripples economic growth


In kicking the proverbial can down the road, congressional leaders acquiesced to the demand that wealthier Americans pay higher taxes. The taxes came as a higher maximum tax rate on individuals making more than $400,000 and a loss of the favorable tax treatment accorded dividend and capital gains income.

This strategy pandered to the majority of Americans who don’t believe they are “rich,” but fall into the great “middle class,” which the politicians claimed they were protecting. In the meantime, the same politicians have deferred dealing with the real issue: out-of-control spending by the federal government.

The same can be said for state and local governments across the nation, as many teetered on the edge of financial disaster during the recent recession.

While many elected officials blame the economic downturn for their recent budget struggles, take that with a grain of salt. State and local governments that suffered the greatest financial shock had previously overextended themselves, adopting new programs and services in the hope a growing economy would produce revenues to sustain those programs and services. When the economy turned, so did the fortunes of those governments. Especially hard hit were local governments dependent upon property tax revenues. As housing values sank, so did the real property tax base which had produced those revenues.

As folks lost their jobs and consumption fell, revenues from net income and sales taxes dipped. Rising unemployment meant people weren’t earning a paycheck — the paycheck that once produced income taxes and put disposable income into the hands of consumers. Wealthy taxpayers with the discretionary income to invest and provide capital to companies or owners of companies, grew skeptical of how government leaders were going to address the economic recession. Instead of investing and putting capital into companies and businesses, those investors sat on their money waiting for government to send a signal it had a firm direction in which to take the economy. Instead, government reacted with more regulations to “protect” the average taxpayer.

Regulations to investors are nothing more than another tax, as those regulations impose additional costs on the taxpayer, who must comply with the myriad of new regulations. As a result of the backlash to the banking debacle and distrust of the financial system, government imposed new — many believe, unreasonable — regulations on the banking industry. Aimed at the culprits implicit in the banking debacle, they fell largely on smaller institutions, including hometown banks and credit unions. While political leaders decided how to fix the economy, the safeguards they adopted also managed to trip up recovery.

Elected officials in Hawaii, desperate to make-up the budget shortfall, selectively raised taxes, resorting to increases that weren’t visible to the public in order to avoid mass resentment on the part of the voting constituency. Those tax increases stand in the way of economic recovery. Although the administration and lawmakers would like to believe economic recovery has arrived with a rebounding visitor industry, that recovery remains subject to the whims of the national and global economy. If Hawaii’s economy is truly to rebound and stabilize, it must attract capital and new investment. To do so, elected officials must address the high cost of living and doing business in this state.

With the highest maximum personal income tax rates, rivaled only by California; one of the highest combined state and local tax rates on fuel; the only double digit “sales” tax, when Hawaii’s 4 percent general excise tax rate is converted into a comparable sales tax rate; high vehicular taxes; some of the highest tax rates on the “sins” of alcohol and tobacco, and the plethora of user fees and charges, which seems to grow year by year, there is no wonder why no one wants to do business in Hawaii. And for those who are here, there is no wonder why so many are throwing up their hands and calling it quits.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii.