Can Another Hawaii Tax Increase Be In The Works?

Graphic illustration by Emily Metcalf
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By Lowell L. Kalapa – Taxpayers are being set up for a tax increase, make that several tax increases as a result of the work of the latest Tax Review Commission.

Graphic illustration by Emily Metcalf

The Tax Review Commission is established by the State Constitution and is supposed to “submit to the legislature an evaluation of the State’s tax structure, recommend revenue and tax policy and then dissolve.” The law implementing that constitutional provision goes on specifically to provide that the Commission “conduct a systematic review of the State’s tax structure using such standards as equity and efficiency.” The Commission is to then submit to the legislature, “an evaluation of the State’s tax structure and recommend revenue and tax policy.”


Note well, as every tax Review Commission before this one has, that neither the State Constitution nor the law implementing the work of the Commission allows that Commission to evaluate state expenditures or make any recommendations with respect to expenditures. However, that is not the case with the current Tax Review Commission which seems to have commissioned their consultants to evaluate state spending and forecast what state expenditures will look like in the future.

The consultant team of Public Financial Management out of Denver, Colorado has submitted an interim report to the Commission that outlines what it is studying in order to make its report to the Commission later this year. In addition to looking at the state’s tax structure, the consultant is looking at Hawaii’s ethnic diversity and aging population as part of constructing a model that will forecast the future expenditures of the state. In turn, it then seems that they will attempt to find additional tax and fee resources to fund those forecasted expenditures. This seems to be exactly the opposite of what the constitutional convention delegates intended of the Tax Review Commission, reconstructing the state’s tax system to provide enough revenues to fund expenditures as opposed to constructing a tax system that is fair and equitable and that will support economic growth.

In other words, the consultant is taking current expenditures and projecting what those expenditures will look like years from now and then recommending how the state can finance those expenditures. This presumes that the current level of expenditures is necessary, if not acceptable, and that the tax burden that is being imposed will be inadequate in the future to fund those expenditures.

Some of the ideas the consultant has floated in this interim report are the need to reconsider the taxing of pensions and Social Security income of seniors and an age dependent tax with a lower-income tax on younger people which the consultants view as an economic stimulant. Another suggestion to which consideration is being given is eliminating the income tax deduction for real property taxes, state income and sales taxes, and possibly other income tax deductions allowed under the federal Code. In the alternative, the consultant suggests raising the general excise tax rate (which they recognize as low because of the broad base which includes taxing services) and combining that move with tax credits to offset the burden that would be imposed on the poor. They have also hinted at the possibility of eliminating the general excise tax exemption for nonprofits and/or imposing fees on nonprofit organizations. And lest they overlook the other option, they are looking at allowing gaming of some form.

The second consultant who is charged solely with evaluating the state’s general excise tax also submitted an interim report. He also seems to have been charged with finding ways to raise additional revenues. The four areas outlined for study in his report would compare the general excise tax to retail sales taxes found in other states, make a recommendation on how the state can tax Internet and catalog sales which he believes total more than $150 million in lost revenues annually. A third target for this consultant was a request by the Commission to review seven current exemptions and estimate the added revenue to be realized if the exemptions were repealed. These exemptions include the contractor/subcontractor deduction, reimbursement of payroll costs by hotel management companies, aircraft leases and aircraft parts, prescription drugs, and premiums received by HMO’s and mutual benefit societies providing health care.

Both consultants didn’t seem to be shy about raising tax rates. When asked if the income tax could be eliminated, the second consultant suggested that a general excise tax of 5.1% could offset the elimination of 90% of personal income taxpayers. The first consultant believes that the TAT rate is low by comparison to other states and should be raised to export more of the tax burden to tourists.

Can there be any doubt that the Tax Review Commission wants to raise your taxes?