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Updated: Feb. 28, 2011, 6:30 p.m.
In delivering his budget this week, Gov. Neil Abercrombie promised his administration “will not avoid making the hard choices.”
He also expressed a willingness to entertain other ideas “to get where we need to go.”
In that spirit, Civil Beat would like to offer up a few suggestions of our own.
First, as it relates to hard choices, it’s not clear from the governor’s budget that he actually is willing to make the hard choices the state needs to make.
The administration makes us scratch our head. On the one hand, he talks about the need for shared sacrifice. An example is his call for a 5 percent cut in state compensation. On the other hand, without any negotiation or discussion, he essentially gave state workers a gift worth more than $100 million in December by promising to raise the government’s share of health-care costs from 50 percent to 60 percent, at a cost of $18 million this fiscal year and $54 million each of the next two years.
Given his overwhelming victory in November, it’s fair for the governor to say he has a mandate. But given the size of the budget increase he’s proposing — 5 percent in 2012 and another 2 percent in 2013 — and the fact that he’s asking for 236 new positions, the governor is making clear that he thinks we need a bigger state government.
This despite the fact that we have $800 million plus deficit over the next two years. It seems clear that Abercrombie has decided that the way to solve the state’s fiscal problems is to raise spending and raise taxes.
We think a more balanced approach would be better. Government’s base spending levels are too high — this, the result of years of a “give now pay later” mentality where government leaders have continually capitulated to special interests. (A few examples: the $9 billion owed for state pensions, the $10 billion owed for state employee and retiree health care.) We also believe that the state has a regressive tax structure that doesn’t support current levels of spending.
The fundamental questions facing Hawaii’s residents are what services government should provide, how we can sustainably pay for those services, and what underlying principles should be adhered to.
UPDATE Numbers don’t lie. In 2008, Hawaii’s tax revenues amounted to 9.91 percent of total income, ranking it in the top half of states. Under the Tax Foundation’s previous methodology, Hawaii was consistently in the top five since 1980.
Despite this high tax burden, we still have a significant budget shortfall.
While Abercrombie is proposing a mix of ways to raise revenue in the short term, we think it’s important to step back and ask whether our tax structure makes the most sense in the long term.
Hawaii state government is paid for from two primary sources: the state’s main revenue workhorse is the General Excise tax (“GE tax” or “GET”) which accounted for 66.3 percent of the state’s tax collections in 2009, and its sidekick, the individual income tax (28.4 percent in 2009).
Proponents of this structure argue that: (1) it strikes a good balance between efficiency and equity, (2) it is a low tax rate applied to a large tax base, and (3) tax revenues grow as personal income grows. Oh, and let’s not forget the argument that the GET enables us to shift our tax burdens to tourists and the tourism industry, the state’s most important. That may be true, but other methods can do the same — if it’s decided that’s good tax policy.
People often confuse Hawaii’s GE tax with sales taxes found in other states. The two are very different taxes. Hawaii’s GE tax is applied to virtually all economic transactions. Sales taxes, on the other hand, typically only cover the final sale of goods to consumers. So the next time you buy something and are thankful that Hawaii’s 4 percent “sales tax” is a bargain, think again. The reality is that Hawaii’s GE tax is the equivalent to roughly a 11 percent sales tax.
Yes, the absolute state GE tax rate is low (4 percent) and it applies to a broad base (90 percent of the Gross State Product). But the problem with Hawaii’s current structure — and let’s be real, the current structure is built primarily on the GE tax — is that it’s a regressive tax. Meaning, people with lower incomes spend a greater percentage of their income on things subject to the GE tax than higher-income individuals. As a result, they pay a higher percentage of their income to the GE tax than wealthier individuals. In addition, in times when the state needs to generate more revenue — like right now — raising the GE tax is extremely difficult. Why? Because it’s a tax on gross receipts which would affect businesses and consumers alike. A business that’s losing money would be required to pay even more in taxes, perhaps putting it on the brink of bankruptcy.
An alternative worth considering is to shift from our current excise tax to one that is based on a sales tax and real property taxes.
A sales tax is based primarily on consumption. The more goods and services you consume, the more sales tax you pay. As in other states, certain goods and services would be exempt from sales tax (e.g., medical, food, etc.). These exemptions would result in a smaller taxable base which mean the sales tax rate would need to be significantly higher than the current GE tax rate. But the tax burden would be more proportionate to one’s ability to pay.
Real property is typically owned by wealthier individuals. Thus, property taxes, currently collected only on the local level, shift the tax burden to those who are more able to pay.
Let’s be clear. First, a different tax structure isn’t a panacea. These are just concepts that requires much more analysis. But building a strong, sustainable economy requires a solid foundation — let’s not treat our existing tax structure as a sacred cow. Let’s not continue to put duct tape on the pukas.
Second, nobody likes higher taxes. This isn’t a call to have wealthier people come to the state’s rescue. But it is a call for those wealthier residents to step up under a new tax structure that is based on one’s ability to pay, if, and only if, the state government started to spend our money like it was its own. That is, government treated money like it came out of its own pocket rather than from the Bank of Monopoly. No more government giveaways to unions, no more “concede-now-and-find-the-money-later” mentality, more government transparency and accountability.
It’s a big task but it’s time for us to get away from the incremental approaches and think big. Because the hole we’re in is just that: big.