Higher liquor taxes, fees on sugary drinks among proposals

A consultant hired to study the Hawaii tax code is recommending a potentially controversial package of tax cuts and increases as a way of rebalancing the state tax system and potentially raising hundreds of millions of extra tax dollars for the state.

A draft report submitted by PFM Group Consulting to the state Tax Review Commission proposes that Hawaii boost its tobacco and liquor taxes, increase the surcharge on rental cars and impose new taxes on sugary beverages, medical marijuana and e-cigarettes.

On the tax-cutting side of the ledger, PFM’s draft report recommends making the state tax system more progressive by increasing the standard deduction for Hawaii income tax filers, and by doubling the state tax credit offered to low-income taxpayers to offset the impact of the state excise tax on food.

The Tax Review Commission has not yet voted on the consultant’s recommendations, which will be finalized in a report due later this month. But even if the commission adopts the PFM proposals, it is unclear whether they will gain traction at the state Legislature.

The state Constitution requires that the commission convene every five years to review the state tax code and propose changes to the Legislature, but lawmakers have ignored commission recommendations in the past.

One important consideration is that next year will be an election year, which can be a politically hazardous time to make dramatic changes in the tax code.

Underpinning the PFM draft proposal is the finding that “it is likely that, based on current forecasts and likely events, the state will have to generate additional revenue to meet its ongoing requirements” for health coverage for public workers and retirees, according to the draft report.

The consultant made a similar finding in a study for the Tax Review Commission in 2012, and state Director of Finance Wesley Machida has said he agrees Hawaii tax collections aren’t keeping pace with growth in the cost of the state’s pension, health care and other obligations to provide services to the public.

The public employees’ health fund had an unfunded liability calculated to be more than $11.7 billion as of June 30, 2015, and the state’s share of that is about $9 billion. The public workers’ pension fund had an unfunded liability calculated to be $12.44 billion as of June 30, 2016.

The Tax Review Commission in 2012 recommended the state establish a panel similar to former President Barack Obama’s Simpson-­Bowles Commission to develop recommendations on possible state spending cuts and tax increases, but that was never done.

Not everyone is comfortable with the focus on tax increases. Tax Review Commission member Vaughn Cook said increasing taxes is “one side of the coin,” adding, “That’s one side of how to address an unfunded liability. Another way to address that is to look at the spending side,” and possible spending cuts. Cook emphasized that he is speaking for himself and not for the commission.

Senate Ways and Means Committee Chairman Donovan Dela Cruz said in a written statement: “As government costs continue to rise, in addition to our unfunded liabilities in health care and pensions, as well as billions of dollars in deferred maintenance, there will be a need to generate more revenues to pay for these services. Creating new or increasing taxes to generate additional revenue is only one approach and should not be considered until we explore all other methods.

“Before we go back to the taxpayer and ask them to pay more, we should, among other alternatives, examine our tax collection methods and ways to grow our tax base, utilize public-private partnerships and require additional cost-saving measures for government operations,” Dela Cruz said.

House Finance Chairwoman Sylvia Luke said lawmakers “still have some work in restructuring how we spend monies, and how we can be more transparent and efficient.”

“Coupled with any kind of large tax increase to support government service, I think we need to have a discussion about are these the type of services that we want to provide,” she said. Luke said she wants to hold a public hearing on the final report and the final recommendations by the Tax Review Commission.

Sure to stir controversy if it advances is a proposal to reduce the income tax exemption for pensions under the state tax code. Hawaii does not currently tax pensions, which PFM Director Randall Bauer said is “not the norm” because most states tax at least some pension income.

However, the pension tax issue in Hawaii has an instructive recent history that is well known in political circles.

Former Gov. Neil Abercrombie in 2010 proposed taxing many pensions to help cover a severe budget shortfall, but the idea was fiercely opposed by the AARP and quickly rejected by lawmakers. Some observers believe political backlash from that proposal contributed to Abercrombie’s loss in the 2014 Democratic primary.

Luke said that unless it can be demonstrated that very-high-income pensioners are moving to Hawaii to dodge taxes in their home states, “I don’t think the Legislature would be very open to looking at this issue again.”

Other proposals by the consultant may be more viable politically.

Lawmakers have already been searching for ways to collect excise taxes on online sales, and have debated at length various plans to collect hotel taxes on transient vacation rentals that often do not pay them today.

That effort to tax Airbnb-type vacation rentals is strongly supported by the hotel industry, and Luke said it is “something that we need to look at.”

Of particular concern are companies that charge the tax to tourists, but don’t remit those collections to the state, she said. Lawmakers need to be careful not to interfere with the counties’ ability to regulate where transient vacation rentals operate, but “I think this is going to continue to be a big problem,” Luke said.

The concept of eliminating the state tax write-off for property tax payments is another option, but Luke said lawmakers are watching to see what Congress will do with its efforts at tax reform. If Congress eliminates the federal deduction for property tax payments and the state then does the same thing, that could be a “double hit for a lot of the residents,” she said.

Republican House Minority Floor Leader Gene Ward was critical of the draft report, saying the proposals for increases in so-called “sin taxes” such as taxes on liquor and tobacco have been contemplated by lawmakers for the past decade.

“What creatively have they done?” Ward asked. “What was new in that report that you didn’t know about? They threw the spaghetti against the wall, and what stuck was the shopping list that they’ve been putting out year after year. Their job is to be creative and innovative.”

Instead of a tax review commission, Ward said what the state needs is a “spending review commission” because “that’s where we’ve got the problem.”

The Tax Review Commission is scheduled to meet again on Oct. 3, and will hold several additional meetings later this year to discuss the final PFM report and other issues before it is scheduled to submit a final report to the state Legislature in December. For more information, visit 808ne.ws/ HawaiiTRC.