As lawmakers begin to huddle before the start of the next legislative session, the search for an answer to the budget short fall begins. With a cumulative deficit of nearly $1.4 billion over the two fiscal years of this biennium, lawmakers will have a Herculean task before them.

Although there will, no doubt, be additional cuts made to programs and services, some lawmakers are talking about increasing taxes, eliminating exemptions, and reducing deductions. Last year lawmakers learned how politically difficult it is to raise taxes as they adopted taxes aimed at very well defined constituencies. After all, who could find fault in raising the income tax on the “rich” as lawmakers hiked the maximum income tax rate to 11% and started imposing higher rates on individuals making $150,000 and couples with $300,000 of taxable income.

But instead of boosting personal income tax collections, collections of this tax have actually declined from the previous year. Why? Could it be that it is these very individuals who had money to invest in the state’s lucrative high-technology tax credits? And even though lawmakers curtailed just how much a holder of the high-tech tax credits could claim in any one year to 80% of income tax liability, the higher income tax liabilities of these individuals just means that they will be able to accelerate the use of their tax credits because of large tax liabilities.

Then there is the favorite legislative target for increased taxes, Hawaii’s visitors. Lawmakers increased the rate of the transient accommodations tax or TAT by a percentage point on July 1st of last year and will do so again on July 1st of this year. At that point the TAT, or the hotel room tax, will be 9.25%. When combined with Hawaii’s general excise tax, the tax on a hotel room rental will be more than 13%. While low occupancy rates and declining room rates have contributed to the decline in the collections of the TAT, the irony is that the bulk of the collections of these taxes doesn’t go into the state general fund. So the increase in the TAT rate really doesn’t address the general fund shortfall.

So political leaders now want to scoop up that portion of the TAT that goes to the counties. Of course, county officials are not happy about those prospects. But such a heist just means that the counties will be faced with the same dilemma, either cut programs and services or raise real property taxes. So stealing the TAT receipts from the counties doesn’t help address the dilemma facing taxpayers – the prospect of a tax increase.

Finally, lawmakers resorted to raising yet again the conveyance tax primarily on large transactions of real property with the thought that they could bleed wealthy “snowbirds” who want to purchase a second home in Hawaii. What they failed to recognize is that many of the large transactions are purchases of raw land for new developments either residential or commercial.

As a result, the higher cost of the conveyance tax will merely be folded into the subsequent disposition of the property as the land is subdivided for house lots some of which are supposed to be “affordable” and for commercial businesses, many of which will, no doubt, be small businesses.

Lawmakers also attempted to generate additional revenues, many of which they hoped no one would notice. For example, they rescinded the federal provision that allows taxpayers to offset gambling winnings with their losses. They also suspended the capital goods excise tax credit which allows businesses to file for a refund of the general excise tax on the purchases of capital equipment.

This tax credit was designed to reduce the cost of acquiring capital equipment that has long been recognized as crucial for the creation of jobs. Unfortunately, the suspension of this credit could not have occurred at a worse time as the unemployment rolls continue to grow.

Instead of the suspension of the capital goods excise tax credit, lawmakers probably should have considered suspending claims of the high technology tax credits and a number of other targeted business tax credits for which claims of job creation and contributions to the state’s economy remain questionable as reported by a recent study done by the University of Hawaii faculty. This would put about $130 to $150 million back on table for discussion as a way to solve the budget shortfall.

And like the temporary increase in personal income tax rates and the suspension of other tax provisions, taxpayers claiming these generous credits wouldn’t be losing them altogether, they just would have to wait until the state gets over this hump. After all, everybody must be asked to share some of the pain of this economic slump.

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

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