Obvious is Only Now Apparent

article top

As this legislative session began, it seemed that lawmakers were obsessed enacting yet another round of economic stimuli as the number of tax credit proposals outnumbered almost every other type of tax concept in the legislative hopper.

There were tax incentives to drive construction, create more jobs, attract various types of new businesses to Hawaii, support the film industry, build a raceway park, and so on. Millions of dollars would be given away through the back door called “tax credits.” It seemed like there was no end to the long line of those who believed that they deserved a tax credit because their idea would either stimulate the economy or create new and better paying jobs.


Well, the half-time show is over and as lawmakers search for the light at the end of the session tunnel, the bright light they see is not the end of the dark cave, but that of a speeding locomotive headed their way, apparently with no brakes of which to speak. That locomotive is probably the most important bill of the legislative session and it is about to do lawmakers in. It’s called the state budget.

In particular, it is the state general fund budget, the one that relies largely on the taxes you pay. By comparison to other states, it may not seem large, but by any other comparison, it is a lot of money — nearly 7.5 billion dollars over the next two years.

Although lawmakers are faced with a substantial shortfall between the amount that they would like to spend on government programs and the amount of money anticipated to be raised through all sorts of taxes, the size of the problem is not as large as many other states are faced with as they work on their budgets. Then again, it is all relative.

Regardless, this half of the session is now obsessed with finding ways to raise enough money to cover the shortfall in the state general fund budget. True, there is the big bill, the increase in the general excise tax rate from 4.0 percent to 4.5 percent which could raise as much as $200 million a year, but there are a number of smaller tax increases which all contribute to the pot.

For example, there is the county option retail sales tax that would allow the counties to impose a retail sales tax of 1 percent. Note well that this is not a tack on to the state’s general excise tax, but a brand new tax imposed only on goods and then only on the final consumer. Initially, the option would have been available only to the City & County of Honolulu and it was supported by the governor on the basis that it enhances homerule, allowing the City & County to determine its own destiny.

However, as it emerged from the Senate last week, the option is now extended to all counties and the rate must be 1 percent in all cases. The optional tax would have to be adopted by the City & County by Aug. 1 of this year and by the other counties by Oct. 1 of this year and be imposed as of Jan. 1, 2004.

Well, these strings seem to have dissuaded the governor’s support who no longer thinks it enhances homerule because of the restrictions. But if signed into law and implemented by all counties, it would raise about $160 million in new money for the counties. So how does the state benefit from what appears to be a boom for the counties? Under the bill, the counties would lose all (in the case of Honolulu) or part of the revenues they get from the state’s hotel room tax or TAT. Those lost revenues would accrue to the state’s general fund. How much? A tidy $30 million to $50 million annually would fatten the state’s general fund coffers.

Finally, there is the proposed vehicle registration fee increase to fund the emergency medical services program, a program that is required to be paid by the state under a mandate adopted back in the 1970s. Initially, the proposed hike would have to be adopted by each county. However, when it was pointed out that if one or more of the counties did not adopt the registration fee hike, would that mean they could not get emergency medical services? The response was to make the increased fee mandatory. That will generate between $9 million and $10 million in the first year. Most of the money would be deposited to a state special fund to run the emergency medical services program and some would be kept by the counties to pay for administrative costs.

Again, it should be noted that this is a program that is currently paid for out of the state general fund. Thus, the hike in the vehicle registration fee is nothing more than an increase in taxes to help balance the state general fund without making drastic cuts to other services.

So is tax hell getting hotter? Based on the above, it would sure seem so.

”’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”’ https://www.tfhawaii.org