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Cut back on GET exemptions

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If there was something like a Hippocratic Oath for lawmakers, it should include something like the directive to doctors to “do no harm.” More precisely: Do as little harm as possible. It’s hard to imagine, in Hawaii’s difficult budgetary straits, that all harm can be avoided. This is going to hurt.

The dilemma confronting the state, which can’t entirely cut its way out of a $1.3 billion biennial deficit, is that there are two main routes toward significant boosts in revenue. Neither is attractive.

One is raising the state’s general excise tax rate, which has stood at 4 percent statewide since 1965 (on Oahu, taxpayers tack on an additional half-percent surcharge to finance the city’s rail project).

The other is the elimination of GET exemptions on selected businesses, as proposed in House Bill 799. The measure was held in the Senate’s Economic Development and Technology Committee but now the concept has been revived as an alternative to the overall GET rate hike.

Given this choice, the lesser of two evils seems to be suspending the exemptions, along with other limited revenue options — such as a pension tax and consumer-driven sources like a soda tax. These can’t produce enough to close the budget gap, so significant savings on labor and other cost drivers will be needed on the spending side as well.

The state Department of Taxation estimates that a limited suspension could generate $161.7 million in fiscal year 2012 and $185.1 million in fiscal year 2013.

Compare that with the estimated $500 million annual yield of a 1 percentage point hike in the GET, and it’s obvious why some senators are leaning toward the bigger-bucks potential of a GET increase. Senate President Shan Tsutsui even theorized that reinstituting the tax on certain businesses could be worse for the economy than an across-the-board increase, but he’s not persuasive on how that’s even possible.

The state House and the Abercrombie administration are staunchly opposed to a GET increase, and for good reason. It’s a tax that compounds at each transaction level, driving up costs of goods and services, which is not what needs to happen in a weakly recovering economy when people remain leery of discretionary spending.

Further, it’s a regressive tax, disproportionately affecting lower-income groups for whom spending on food and other essentials dominates the household budget. Some have proposed increasing various credits and tax exemptions for these groups, but this would be arbitrary. We’re all in this fiscal hole and basic fairness should apply. Why raise such a broad-based tax at all?

Lowell Kalapa, executive director of the Tax Foundation of Hawaii, is characteristically unenthusiastic about tinkering with the GET exemptions during a weak economy, but even he acknowledges that some of them no longer serve a compelling purpose. For example, he said, the exemption on “gross proceeds received from shipbuilding and ship repairs” was instituted almost 40 years ago to counter a plan for Navy vessels going to San Diego for repair.

Another one that’s hard to justify, he said, is the exemption on “amounts received by labor organizations for real property leases,” which had the labor nonprofit Unity House in mind.

He rightly argues that lifting some exemptions, such as the one on stevedoring, would have a pyramiding effect, damaging the economy. Suspensions of the exemptions must be done carefully.

At the very least, the fiscal crisis provides the push needed to perform an aggressive weeding of the exemptions list. Businesses and the public at large hate tax increases, but if they’re limited in scope — and paired with spending cuts — they’re easier to sell as a means to cope with an emergency. Many exemptions represent aberrations in the tax code, and they need to go.

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