As lawmakers debate the merits of this or that tax proposal, it might be worthwhile to review the hallmarks of good tax policy and perhaps check out how some of the latest legislative proposals measure up against these long-honored aspects of good tax policy.
Nearly everyone agrees that taxes should be fair and equitable — treating people in equal situations alike and those in unique situations differently based on the taxpayer’s ability to pay. An issue discussed here in the past relating to the taxation of pension income would be a case in point. Just because a retiree receives his or her retirement income in the form of a distribution from a 401(k) as opposed to a pension from a defined benefit plan should not prevent that person from also being excluded from paying state taxes on the distribution. If retirees who receive a payment from a defined benefit plan are exempt from paying state income taxes, so should those who receive their retirement income in the form of a distribution from a 401(k) plan.
A tax should be efficient in that it doesn’t cause extraordinary work to administer it or for that matter for the taxpayer to comply with the law. It should cost little to administer in proportion to the revenues it produces. It should not impose extraordinary burdens with which taxpayers must comply that would cause the economy to perform below par. For example, a county proposal would impose an inefficient tax on motorists by imposing a vehicle tax based on the value of the automobile. Automobiles tend to have unique characteristics and are subject to all sorts of external factors. Determining value of personal property is so difficult and time consuming that it makes for an inefficient tax and costs more to administer than the revenues that might be realized from a personal property tax on that vehicle.
A tax should affect the economic system as little as possible, that is, it should be neutral and not cause people to stop working or investing or saving or to make other basic changes in their economic lives. A case in point is the luxury tax the federal government levied on yachts back in the 1980s, thinking that only the rich could possibly own yachts and sail boats. In reality, the rich stopped building or buying yachts in the country and either did without or went outside the country to purchase their pleasure boats. But more importantly, the luxury tax put the carpenters and ship fitters out of work. Instead of punishing the rich for buying such luxury items, they punished the poor working stiff who built those ships of luxury.
A good tax brings with it a certain amount of certainty in that the taxpayer knows what the tax is, the amount imposed, and what is being taxed. A good tax — if there is such a thing — is certain and predictable so that a person knows what tax he or she owes and why. Sometimes problems occur when a new tax is created. Such was the case of the transient accommodations tax when it was first adopted by the 1986 Legislature and implemented in 1987. Because Hawaii had never had a hotel room tax, there was uncertainty as to what was taxable. Initially there was no concrete time period which hotel owners could hold up as a standard by which to determine whether or not they owed the tax. Initially it appeared that a hotel needed to have a paper certificate for each and every room they rented out and it was pointed out the department would have needed empty toilet paper cartons to store all of the certificates.
A good tax has a broad base so that a lower rate can be maintained. The general excise tax is a good case in point. It taxes nearly all transactions taking place in Hawaii and has one of the lower rates of any transactions tax in the nation.
That said, exemptions and exclusions erode the tax base and create apathy in those who enjoy those exemptions. A proposal to do away with the tax on food or medical services would insure that the vast majority of the voting public probably would pay even less attention to how lawmakers spend tax dollars as the bulk of their purchases would not contribute to the pot that lawmakers like to spend.
Tax shifting favors one taxpayer over another, creates confusion and the illusion that taxes are being cut. Such is the case of the tax credit for the Ko Olina development. The favored project gets tax breaks while the rest of us taxpayers keep on making the payments. Oh, and most importantly, we should remember things like businesses don’t pay taxes, only people pay taxes as the tax on things gets passed on to us as people.
”’Lowell L. Kalapa is the president of the Tax Foundation of Hawaii, a private, non-profit educational organization. For more information, please call 536-4587 or log on to”’ http://www.tfhawaii.org