Hawaii Senate Chambers

Depending on who is asked, a 1 percent hike in the state’s General Excise Tax will send the state’s fragile economy spiraling downward – or the tax increase is exactly what is needed to cover an estimated $1.3 billion budget shortfall as well as pay increases and benefits for the state’s 45,000 government employees.

The Senate’s Ways and Means committee will consider this controversial GE tax hike increase measure on Wednesday at 9:30 a.m. in the state capitol’s Room 016.

House Bill 793, which was gutted from its original House version into a Senate Draft 1, proposes to both suspend tax exemptions until 2015 and increase the GE tax by 1 percent until 2013.

While hundreds of public employee union members are rallying at the state Capitol on Monday in support of the GE tax hike and their fellow union members in Wisconsin, taxpayer advocates such as Lowell Kalapa of the Tax Foundation of Hawaii maintain this tax increase would be devastating to Hawaii’s economy and the state’s collective bargaining.

“The paradox is that this proposal comes in the same week that the public employees are at the capitol screaming about collective bargaining. This is new debt on the taxpayers for their salaries — their paychecks are coming at the expense of everyone else’s,” said Kalapa.

The House Democratic leadership, starting with House Speaker Calvin Say, hasn’t been supportive of a GE tax hike this session and the 8 Republicans in the House and one Republican in the Senate are opposed. However, the majority of the Senate Democrats are pushing the plan.

Gov. Neil Abercrombie, D-HI, who campaigned on a promise not to raise the GE tax, has expressed opposition to the measure. However, capitol insiders point out that as the governor’s proposed tax measures begin to fail, he could say he was pushed into a GE tax increase since there are no other “revenue enhancements” going forward.

The state is facing a $1.3 billion shortfall with a $232 million deficit to cover from now until June 30, 2011.  An estimated $1.1 billion is what is needed to operate the state from July 1, 2011 to June 30, 2013 unless substantial cuts are made to spending, said Linda Smith, a spokesperson for the House GOP

“It is deadly – absolutely the most deadly choice to make because this taxes people at all level of transactions. Overall this is going to have substantial impact on the cost of living and doing business in Hawaii,” Kalapa said.

Kalapa maintained: “Taxing our way out of this budget problem is not the solution. It will only make the situation more dire, because it will raie the cost of doing business and put more people on welfare and unemployment,” he said.

Rather than tax hikes, Kalapa advocates an across-the-board wage reduction for state workers, whose salaries and benefits account for 70 percent of the state’s operating budget.

He said the state furloughs, instituted last year under Gov. Linda Lingle, were ineffective, because the time off slowed down government operations and made government less efficient, and in some cases, more costly because of overtime pay to catch up.

State collective bargaining could also be impacted if the GE tax hike passes, Kalapa said, putting the public unions in a stronger position to use the tax hikes to justify a pay raise and additional benefits.

Senate Democrats maintain some families in Hawaii will see a tax decrease under this proposal because they are adding food and child care tax credits, but Kalapa says the tax will hurt everyone. Kalapa and other opponents say this tax hike would put a lot of businesses out of business, and hurt the state when it is most economically fragile.

Republicans say none of the Democrats are seriously considering meaningful spending cuts as is being done in other states.  They note cuts being discussed now by Democrats are from the governor’s $23 billion budget, which added more than $750 million in expenditures, personnel and costly benefits to the state’s base operating budget.

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