New report advises tax hikes, which could tax lawmakers

Just in time for the November elections, an important state commission was just handed a new report urging state taxes be raised dramatically.

The new report urges the state to raise taxes, tax pensions, and cut or cancel tax deductions. And it wants to continue increased hotel room taxes.

The report also says cigarette and alcohol taxes should be raised.

If you had planned to go to a coffee hour to meet a state candidate or if there’s a candidate at your door, just ask "Do you agree with the recommendations of the report given to the Hawaii Tax Review Commission?"

The commission will hold a public hearing on the report at 9 a.m. Tuesday in the state Capitol. It is the sort of hearing that should be held in the evening so the tax-paying public can comment.

The report is the 150-page product of more than a year of study by the Philadelphia-based PFM Group that examined the state tax system.

In an unusual twist, the report does not start by looking at the taxes in Hawaii; it starts by looking at how much money the state will need in the future and then how it can get it.

Interestingly, the state Constitution just says the commission shall provide "an evaluation of the state’s tax structure, recommend revenue and tax policy," not figure out how much money the state should spend and then figure out a way to get it.

"It is not for them (tax commission) to decide what future expenditures should be. This is a slap in the face of the Legislature. Only the Legislature determines state revenues," says Lowell Kalapa, president of the private Hawaii Tax Foundation.

The report, however, constructed a "multi-year financial forecasting model that projects" how much money the state will take in and how much it needs. That projection is done by assuming the current level of services.

As you might expect, the projection is that if everything stays the same, we will run out of money. This reports says by 2018 and by 2025 the annual budget gap would be $240 million.

The report notes that while Hawaii has a fiscal obligation to balance its budget every year "the growing gap between ongoing revenues and expenditures is a sign of a structural issue.

"The current revenue structure is insufficient to meet near and long term needs of the state," the report says.

The answer is to raise the excise tax to 4.5 percent, meaning that on Oahu it would be 5 percent, because of the half percentage point increase already tacked on for rail.

The report calls the excise tax a "consumption tax," which, according to tax critic Kalapa, is wrong. He says Hawaii is unlike any other state because our 4 percent tax isn’t just added when you buy milk or get a haircut; it is 4 percent every time money changes hands. The PFM report, however, says because the rate hasn’t changed in 35 years and most states have raised their sales tax, this "is the logical method to improve the long-term financial outlook."

The state picture would be about $350 million a year sunnier, if the GET is raised.

And that pension tax? Kalapa says that all private companies now give employees the option of contributing to a 401(k) plan, with taxable benefits, but state and county workers all have a defined benefit plan that today is not taxed.

Part of the reason pensions need to be taxed is so the state would have enough money to pay those state pensions, so you might say there is a rough fiscal equilibrium reached, even though it would probably send Kalapa screaming from the room.

Interestingly, the report is sort of an early Christmas present for Gov. Neil Abercrombie, who has been lobbying for portions of the tax increase package for two years.

Taxpayers will have to decide what they are getting with this report.

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Richard Borreca writes on politics on Sundays, Tuesdays and Fridays. Reach him at rborreca@staradvertiser.com.