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Tuesday, November 25, 2014         

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Randy Iwase

The Tax Review Commission chief would like to see a Simpson-Bowles-type plan for Hawaii

By Vicki Viotti

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Randy Iwase, veteran of the state Senate and one-time gubernatorial candidate, has left politics but hasn’t strayed that far. He chairs the state Tax Review Commission, a panel assembled periodically to recommend tax-code changes to help the state cover its bills.

One problem: This time the commission concluded that the state was headed for some serious red ink and that it couldn’t be fixed with tax reforms alone.

What’s needed, Iwase said, is another panel, one that has the power to propose changes in both the way state government raises revenue and the way it spends. The shorthand description of this body, as policy wonks might guess, is “Simpson-Bowles,” the name of the panel convened to prescribe a cure for the federal fiscal illness; it bears the names of its chairmen, Alan Simpson and Erskine Bowles.

Of course, their plan has not been adopted, but Iwase believes having a plan — for our state troubles as well — is still important: It can be revisited at some point.

“Now we still have the same problem, this talk of the fiscal cliff,” he said. “But you have this blueprint. Like any blueprint, at least you have this plan that is structured; now you can start adjusting it.”

At 65, Iwase said he loves having the time to lavish on his grandkids that he lacked before, but acknowledges that the upcoming tax discussion is likely to cut into that. The tax panel veered into controversy in recent months, when a study by The PFM Group, a Boston firm hired as consultants, included a proposal to raise the general excise tax (GET). The commission did not endorse that idea, though.

Among the state commission’s other findings: Congress needs to pass legislation enabling states to collect taxes that are now lost when customers shop on the Internet; the state tax office needs to staff up to increase auditing and back-tax collections; and tax incentives are needed to spur new business to diversify the economy, along with set criteria for gauging their effectiveness.

“I believe every single tax credit law ought to be have to have a sunset review,” he said. “Then the proponents of that law would have to justify renewing.”

 

QUESTION: The Tax Review Commission’s latest report included a criticism from commission member Michael McInerny, who said people might think you’re endorsing some of PFM Group’s recommendations, such as a GET tax increase, which you’re not. What did you think of that?

ANSWER: You’re probably right about him saying that too much of PFM was included, but it was included in the summary section of every report. So every report is summarized in Section 3, and that’s what we did; Section 4 is the recommendation.

But for the rest of us, I know that for me, when I was appointed, I wanted to do something different. … All of us wanted to do something different, something big, something important for the state to grow the economy. …

We shrunk the focus of the big report to two areas: Given the recession, is the tax structure adequate for the 21st century? If not, what do we do? That’s the PFM study. … We also asked (commission Executive Director) Don (Rousslang) and the tax department to look at the tax structure as well. …

When we got back particularly the PFM report, the magnitude of the projected shortfall, I think all of us were, “Oh, my goodness!”

Q: Worse than you expected?

A: We had another report we went out for proposal on, Dr. (William) Fox, and we were looking at things like, what if we eliminate the income tax? On a revenue-neutral basis, replace it with an increase in the GET. What kind of bump in the GET? If you notice, we don’t even discuss that in this report.

Because this thing just overwhelmed everybody. It overwhelmed me. When you see things like $3 billion accumulated shortfall … you go, wow. And the shortfall, at least in the PFM report, starts in 2014, at about $200 million-plus.

Q: So it’s soon.

A: Soon, yes. So you go, OK. And we start switching. Now, the Tax Review Commission — and I’ve said it over and over and over again — its charge is to review the state’s tax structure and “recommend revenue and tax policy.” That is our charge; we do not look at expenditures.

Having been at the Legislature, that is a whole different bag, because you’re looking at the policy, you’re looking at the effect of a cut in expenditure or increase in expenditure, who gets hurt, what kind of people you cut — stuff like that. There’s no way we could even do that, in the time we had. We had no time, we had no money. …

And so the PFM came back to us with a comprehensive package … of tax revenue proposals, which is all we can do. Now, we did not adopt that, because they also produced for us a forecasting model, where you can plug in things, pull out things, expenditures, revenues, and project out to the year 2025: How is this going to affect the budget picture?

Q: Is the forecasting model primarily for future computations?

A: That can be used now. Now. Unfortunately, our report comes out now. And everybody is rushing to deal with the budget proposal for the forthcoming session.

Hopefully, hopefully, once that’s finished, and you’re looking forward, from 2013 out, you begin to utilize the model to create scenarios. … There was unanimity in the commission that this was one of the values coming from our interaction with PFM.

So we said, look, PFM had a comprehensive approach. We don’t adopt the specifics, but what we do say is, when you address the shortfall from a revenue perspective, you have to do a comprehensive approach. You cannot say, “I’m going to increase the GET a half-percent,” and do nothing else, because the model shows that doesn’t address the shortfall.

Q: The tax increase wouldn’t raise enough money to cover it, anyway?

A: Yeah. Well, if you just increase the GET, it doesn’t raise the money to address the shortfall that will accumulate to 2025. So they had other things in (the PFM report). They adjusted the corporate income tax. … They said, do not sunset the transient accommodation tax — there was a bump in the tax — do not allow it to sunset. Keep that tax. Keep the tax on liquor, keep the tax on tobacco, these things that bring money in. …

GET is regressive — it hurts poorer people. PFM also recommended things like increasing the deduction, for food tax credits, etc., to help with that issue. So it’s a package, that you deal with how much money can you raise, and is it consistent with the principles of tax policy, such as fairness and equity.

Q: Most of the focus was on the GET proposal, right?

A: Yeah, because guys get all excited when you hear talk about GET. I’ve been around politics for a long time: You mention GET, and people wake up. Unfortunately, they ought to wake up for other things.

Q: But you would agree that the GET tends to compound on everything, so there’s a reason why people get upset about it?

A: The pyramiding? You know, the pyramiding issue is one issue. I think it’s more general. People don’t like tax increases, period. You could talk about income tax increases and get the same reaction.

Now, that’s why the first recommendation we make is Simpson-Bowles. What we understood was, if you address this picture solely from the revenue side, we’re talking about just a GET increase to 5.666 percent.

Q: That includes the Oahu transit surcharge?

A: No. On Oahu, it would be 6.166 percent. … So that’s tough. It’s a rough issue. So we said you gotta deal with it from both the revenue and an expenditure side; we cannot do it. We recommend a Simpson-Bowles-type commission, so that you can, first, have a commission that can look at both. Second, my hope is, as was the hope for the federal fiscal commission, that it would be funded.

We were not funded adequately. … And the tax department — and this was another thing we had in the report — the staff was depleted. … So we were handicapped that way.

Second, unlike the Legislature, which has to run around every session with a myriad of issues, and they become consumed by the present — you can’t look forward out into the horizon, because you’re consumed with what’s gotta be done today. This commission can drill down on that specific issue: We’ve got this shortfall — what do we do?

Finally, my hope is that such a commission includes all of the stakeholders, because they ought to come to the table. Business, labor, nonprofits. … Representing their various constituencies, they will see and come to understand what we have, that this is a very serious problem. It’s not a tax problem only, it’s an economic problem.

Q: Didn’t everyone in Washington run away from the recommendations of the Simpson-Bowles panel anyway?

A: They had some very tough cuts and revenue increases. When you say they ran away from it, I say no. What I see as the value of Simpson-Bowles is that it’s a blueprint that was created; it is there.

Q: It provides a starting point?

A: Yes. In fact, a little more than a starting point. You have the blueprint for the structure. More and more you hear people, including Paul Ryan (one congressman who voted against it), talking Simpson-Bowles. The blueprint is there, there is value to it. And the value continues to this day. …

What the (Hawaii commission) report says is you have this huge shortfall. … If you don’t have the money, and let’s say you address it solely from an expenditure side, well, it’s going to make Furlough Fridays look silly. It’s going to make Furlough Fridays like the good old days. Because you’re going to have to cut our schools even more. What about the University of Hawaii? What about the inspectors for rats in Chinatown? What about inspectors for food? …

So it’s not just a tax issue anymore to me. It’s an economic one. And that’s why the sense of urgency in my mind, and I know with the other commissioners, is that this has got to be addressed.






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