Randy Iwase began Tuesday’s Hawaii Tax Review Commission hearing at the state Capitol by reminding everyone of the terrorist attacks on the United States.

“Let’s put things in perspective,” he said. “That while what we do today is important, what happened to our nation 11 years ago and what the families of the heroes go through everyday since Sept. 11, 2001, is at a far different level.”

Iwase was speaking to a conference room full of people unhappy with a 154-page report from the mainland firm the PFM Group that recommended dramatic changes to Hawaii tax policy.

The proposals include raising the general excise tax, hotel taxes, corporate income taxes and cigarette and alcohol taxes; reducing or eliminating current deductions such as for income and property taxes; and taxing pensions.

The PFM Group report also projects what state revenues and expenditures will be in the year 2025 based on current levels and says we’ll be deeply in the red — hence the need to raise revenue.

Opposition to the tax hikes include a majority of lawmakers in the state House.

“We feel that such a significant net tax increase probably will be detrimental to private businesses, residents, or both, and that PFM has not sufficiently analyzed the impact of the tax increase on the economy, businesses, and residents,” House Democrats — 29 of them, including Speaker Calvin Say and Finance Chair Marcus Oshiro — said in joint statement.

“We find these recommendations, as well as others in the report, disappointing and disagreeable as they increase taxes on individuals and businesses placing a greater burden upon them,” said members of the minority caucus led by Rep. Gene Ward. “This is especially problematic given the state of Hawaii’s economy and the significant cost of living faced by residents of the state.”

Lowell Kalapa, president of the Tax Foundation of Hawaii, argued in his Civil Beat column Sunday that the Tax Review Commission has exceeded its mandate. He compared the cost of the PFM Group’s report with the “Stevie Wonder blunder” at the University of Hawaii this summer, in which the school appears to have been swindled out of $200,000 for a fake concert.

(The cost of the PFM Group report, along with a separate report regarding the GET, totalled $180,000.)

Meanwhile, testimony submitted for Tuesday’s hearing was heavily in opposition, and it came from real estate agents, bankers, accountants, builders, contractors, the visitor industry, nonprofits and retirees.

The Tax Review Commission went on the defense.

Contrary to Kalapa’s assertions, Iwase stressed that the commission, which meets every five years, is indeed following its mandate to make recommendations on tax policy. He said the two reports came from hired consultants and so should not be considered the opinion of the commission.

According to state law, the commission’s mission is to look at the fairness of the tax structure but also consider the revenue picture:

The commission shall conduct a systematic review of the State’s tax structure, using such standards as equity and efficiency. Thirty days prior to the convening of the second regular session of the legislature after the members of the commission have been appointed, the commission shall submit to the legislature an evaluation of the State’s tax structure and recommend revenue and tax policy…

Any changes in taxes, said Iwase — a former legislator — can only come from the Legislature. Besides, the history of past Tax Commissions would show that the panel had a pretty low batting percentage when it came to lawmakers adopting their proposals.

Speaking to reporters after the hearing, Iwase said he was not surprised by the negative reaction to the report.

“I fully understand,” said Iwase, a pensioner himself. “Thank God my wife’s working.”

Report Due in December

Many of the ideas in the PFM Group report — raise the GET, tax pensions, increase sin taxes, cut exemptions — are not new ideas.

Cigarette, tobacco and alcohol taxes, for example, have been increased over the years. Talk of hiking the GET by another half a percentage point is discussed nearly every legislative session but is invariably shot down (the sole exception being the increase of Oahu’s GET to pay for rail).

In Gov. Neil Abercrombie‘s first legislative session, he saw his fellow Democrats reject his tax increase proposals, including to tax pension income, repeal the state income tax deduction and up the Transient Accommodations Tax on timeshares.

The PFM tax increases would not only help maintain existing programs and services — as well as fund pay raises and benefits for public-sector workers — but also address the growing unfunded liabilities of pension and health plans for state workers and retirees. Indeed, as Kalapa himself observes, PFM had those liabilities in mind when it crafted its proposals.

The concern, some suggest, is that the Tax Review Commission’s recommendations would give cover to lawmakers to make unpopular decisions.

Iwase — an Abercrombie ally — said the commission’s report to the Legislature, expected in December, will also include reports from state Tax Director Fred Pablo and others. But those reports haven’t raised a ruckus.

Much of Tuesday’s hearing involved a sometimes testy exchange between Iwase and Kalapa, the latter of whom was one of the few to testify in person.

Kalapa repeated his view that the commission strayed from its mandate. One by one he rejected the PFM Group’s proposals and said the report amounted to “a slap in the face” for the Legislature, whose job it is to determine expenditures.

Kalapa argued that the PFM Group did not understand Hawaii and didn’t do its homework, and so its report is full of multiple errors.

Regarding increasing “sin taxes,” for example, Kalapa said, “As I point out many times to my fellow imbibers, if in fact we divided total consumption by residents in this state, we’d all be drunk 24 hours a day and in the gutter.”

His point was that visitors consume a lot of alcohol, and they are increasingly finding cheaper ways to purchase booze, such as by shopping at big box stores after arriving.

Should alcohol taxes go up, Kalapa argued, “They (tourists) are going to avoid the costs as much as possible, and the people that will really be hurt are the on-premise businesses, because they have to add to that high cost of alcohol taxes the cost of their rentals and the cost of their markup required by their leases.”

Referring to the Wonder debacle, an irritated Iwase asked Kalapa if he was alleging in his Civil Beat article that the Tax Review Commission had essentially committed fraud by hiring PFM.

“I am saying it’s a waste of money,” Kalapa responded. “I would certainly not hire them again.”

“That is for others to decide,” Iwase responded, adding, “All of us here are professionals, so let’s express ourselves in a professional way and not enage in hyperbole or over-the-top comments that really are insulting to people who you may disagree with.”

Iwase then quibbled with Kalapa over the report on the GET, which was conducted by William Fox, a professor at the University of Tennessee, Knoxville.

Another commission member, Roy Amemiya, went back and forth with Kalapa on the commission’s model projections of expenditures, which Amemiya defended as necessary to understanding future expenses.

Iwase agreed, saying that the model projections are an effort to get a handle on a state economy somewhere between Shangri-La and Dante’s Inferno — that is, neither perfect nor deeply in the red. Again, he reminded everyone at the hearing, it was the Legislature’s call to make cuts and increase taxes.

The 2012 session begins in January.

About the Author