Requiring Lawmakers to Run a Business

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Looking back on the 2005 session it is amazing how many measures sock it to business. Lawmakers remain oblivious to the fact that it is businesses that provide the jobs that their constituents need.
It is also amazing that despite the fact that lawmakers seem to want a healthy economy, they do everything possible to ensure that businesses struggle to survive in Hawaii and remain uncompetitive in the world marketplace. We have talked about the increase in the general excise tax and how insidious the tax is, but to lawmakers it is nothing more than another half cent or as one lawmaker shrieked, “It’s just another penny!”

In fact, House lawmakers sent their staff to disprove the fact that the increase would cost the family of four as much as $450. Instead of proving that the tax increase would be substantially less than the $450, they proved that lawmakers do not understand the general excise tax and how it reaches into our pocket books.


Even the House speaker thought that the “pyramiding” of the tax had been taken care of by the Legislature several years ago. True, one aspect of the tax’s pyramiding had been addressed, but that was only to extend the wholesale rate of 0.5 percent to services when those services are purchased for resale, thus treating services like goods.

What the lawmakers’ exercise proved was that they don’t recognize that businesses must also pay the retail rate of 4 percent on all the goods and services that they purchase for their own consumption. This added cost is then recovered in the goods and services they sell to their customers. So if the retail rate of 4 percent goes up, that is an added cost that must be folded into the shelf price of the goods and services sold by that business.

So when House staffers applied the 4.5 percent rate to their sample families, they applied it to the amount spent and nothing else. They did not recognize that while the family will be spending the same amount after the tax rate goes up as they did before the increase, they will be buying less because the cost of the tax to the businesses will raise the price of all the products and services purchased by the family of four.

And indeed, that’s perhaps because many of our legislators have never run a business and don’t understand how taxes and other state and county laws drive up the cost of doing business in Hawaii.

For example, a bill that the governor has vetoed would have prevented the labor department from adopting rules. The measure was aimed at a set of rules that the department had adopted to reform the workers’ compensation system in Hawaii. Lawmakers argued that the department had no authority granted by law for some of the changes that would have been made by the rules.

And perhaps from a technical point of view, they were right, but what those rules symbolized is the growing frustration with the way the workers’ compensation laws are written. As many observers note, the workers’ compensation laws are so vaguely written and tend to grant a great deal of latitude to the worker that abuses are rampant, driving workers’ compensation insurers to hike rates to cover costs or to leave the market altogether.

No doubt, lawmakers believe that they are protecting the rights of the worker with nary a thought that as workers’ compensation rates rise to cover this abuse, it comes at the expense of the business, either prices are hiked to recover costs or less employees are hired or, perish the thought, employees are laid off.

The same can be said of the increase in the minimum wage that will rise to $6.75 on January 1st of 2006 and to $7.25 on January 1st, 2007. While lawmakers see the increase in the minimum wage as a blow for the worker, what they fail to realize is that with the labor shortage many workers are already earning substantially more than the current minimum wage. What the increase will do is to move everyone’s wages that much more over the minimum as businesses compete for workers.

Again, where do lawmakers think businesses will get the money to pay for the increase in the minimum wage? Will the money somehow fall out of the heavens to pay the additional wages? Of course not, it will come in the form of higher prices or less workers. And in the long run, the very people that lawmakers hope to benefit will need that much more in their paychecks to cope with the higher cost of living. What businesses won’t be able to do is to compete with others in the world marketplace because goods and services produced in Hawaii will be that much more expensive and, therefore, uncompetitive.

Perhaps what might help lawmakers understand the plight of businesses is to put them in charge of running a business and see if they can make a go of it under current laws. If their business fails, they could not qualify for elected office.

”’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”’

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