Although elected officials seem to have been preoccupied in the past couple of months with the negotiations of the public employee contracts, it is imperative that they turn their attention to the upcoming 2010 legislative session and determine what can be done to stabilize the state’s economy.

Faced with budget shortfalls, lawmakers at both the state and county levels will be challenged to find ways to balance their respective budgets. While the expected call for tax increases still resounds among some elected officials, most will duck the question given the fact that 2010 is an election year. Unfortunately, elected officials will dodge the tax increase question for the wrong reason – that it will jeopardize their reelection – rather than truly understanding the impact that raising taxes in a recession plagued economy will have on their constituents.

For example, the Honolulu City Council recently approved the establishment of a “homeowner” category for real property tax purposes at the behest of the mayor. The arguments made by the City administration were, among others, that this would allow county officials to “protect” homeowners from rising property taxes. Translate that into: we expect to raise property tax rates on everyone else.

They also argued that all the Neighbor Island counties already have a “homeowner” class. Translate that into: this mechanism is so politically popular that Neighbor Island officials dare not repeal it.

The reality is that the “homeowner” category allows local officials to raise rates on all other categories of real property in order to raise the money they need to run the county. While it has always been popular to tax the “man behind the tree,” we all know that eventually the increased tax burden comes back to bite all of us as taxpayers and as homeowners. Sure businesses and landlords can pass the increased tax burden on to their customers or tenants, but who are their customers and tenants?

Those customers are their constituents, the very homeowners that county officials are trying to protect, and the tenants are the very people working at the desk or bench next to you.

So who are county officials trying to fool?

They are trying to fool homeowners into believing that they are concerned about the largest block of voters, because they need homeowners to vote for their reelection in November.

However, at the same time they like spending that money they raise from other property owners so they keep the rates high and make us believe that landlords and business owners are ripping off their customers and tenants because businesses and landlords are forced to raise prices and rents to cover the cost of the increased tax burden.

The same can be said for state lawmakers who tout raising taxes as the only way to solve the budget shortfall. Of course, the easiest tax to raise in their minds is the general excise tax because it would be “only a half or one percent increase in the rate.” Lawmakers believe it would be an easy sell because of the slight increase in the rate. Not only is that argument deceptive, but it also demonstrates that lawmakers do not understand the tremendous impact of raising the general excise tax.

Because the general excise tax is so pervasive, it permeates the entire economy, raising costs at all levels of the wholesale and retail chain. It adds to the cost of the overhead of a business that eventually shows up in the shelf price of goods and services purchased by us, as residents, or by consumers outside the state. As costs rise because the general excise tax is a part of the overhead that businesses have to recover, the price of the goods and services sold also becomes less attractive to resident consumers and less competitive to customers in the world marketplace.

With the cost of running or doing business rising, business owners and employers have to reevaluate whether they can keep as many employees on the payroll or perhaps reduce hours, or in the worse case scenario, close the business.

Instead of making up the budget shortfall by increasing taxes to hopefully generate more revenues, a tax increase in this economy may have the devastating effect of putting more employees out of work or working less hours or putting more businesses out of business. Elected officials, at all levels, need to recognize that these are unusual times that will require everyone to tighten their collective belts.

This is particularly true for government that has weathered past economic crisis and continued to grow. This time, government needs to downsize like everyone else.

‘Lowell Kalapa is president of the Tax Foundation of Hawaii’

Comments

comments