State tax cuts threatened

Legislators are considering a proposal to take away income tax cuts promised in 1998.

Gov. Ben Cayetano and the Legislature had promoted the tax cuts, which were to be phased in in three steps, as a way to spur the state’s economy. The first tax break has been phased in, but the bill would cancel the final two reductions.

The Senate Ways and Means Committee yesterday approved Senate Bill 791 to halt the tax cuts, instead offering up a new $25-per-person tax credit for all state residents.

The bill would allow the state to collect tens of millions of dollars more in taxes than it would if the tax cuts are allowed to take effect.

Ways and Means Committee Chairman Brian Taniguchi said he advanced the bill to be sure there will be money available if the state reaches an agreement with the teachers’ union to provide raises to 12,000 public school teachers.

Cayetano has already said he won’t support any proposal that rolls back on the 1998 tax cuts, which is a strong indication he would veto the bill. Cayetano proposed a new round of income tax cuts this year, saying they would make the state more attractive to new business and strengthen the economy.

The bill was immediately attacked by House and Senate Republicans, with House Minority Leader Galen Fox calling the proposal "crazy."

Sen. Fred Hemmings, R-25th (Kailua, Waimanalo), said the proposal demonstrates that Democrats in the Legislature still don’t understand why the state economy has been in the doldrums for a decade.

"I’m very alarmed that this is reinstituting the failed form of government, where we maintain Hawai‘i as the highest taxed state in the nation," Hemmings said.

Taniguchi said the tax cut was deliberately broken down into steps in 1998 so lawmakers would later have the option to cancel some steps if need be. "All we’re doing is saying, yeah, it looks like we won’t be able to afford to take it."

House Speaker Calvin Say said he expects his colleagues will consider the bill.

"With all of the demands out there, I’ll be open to what the Senate may be proposing, as far as it coming over," Say said. "But I’ve got to convince my members also, right? A lot of the members may not be in support of the suspension, but if it is for a good cause, and the resources that we save may be used for programs, I think this caucus should entertain that."

Say said it is difficult to know whether the tax cuts had any effect on the economy. Politically, he said, "a lot of members felt, and me personally, that the impact has been minimal in regards to the cuts."

"I can’t really say why there is no appreciation, but there is no acknowledgment. We talk about a $2 billion cut, but there is no recognition that people have appreciated what we did in 1998."

That year lawmakers approved a three-phase plan that was expected to cost the state $1.5 billion in lost tax collections from fiscal years 1999 to 2005.

The largest tax cut was the first step, which in 1999 reduced the state’s top income tax rate from 10 percent to 8.75 percent, and adjusted lower tax brackets proportionately.

The top rate was reduced to 8.5 percent on Jan. 1, 2001, and is scheduled to be reduced to 8.25 percent next Jan. 1, with proportionate reductions in other brackets. The bill would reverse this year’s rollback and cancel next year’s.

Lowell Kalapa, president of the Tax Foundation of Hawai‘i, said the next step in the tax cuts would cost the state about $76 million a year, and the final step would cost the state about $70 million a year.

Kalapa wondered how the bill fits with lawmakers’ concerns the state might go into a new slump because of economic problems on the Mainland and in Asia.

"They have the prerogative to do that," Kalapa said of the rollback. "The question is, how sincere were they in adopting the tax cuts and in improving the state economy?"

Taniguchi said his committee did want to offer some tax relief, and the bill proposes a $25 per person credit to offset the effect of the state’s 4 percent excise tax on food.

Voting in favor of the bill were Sens. Taniguchi, Colleen Hanabusa, D-21st (Barbers Point, Makaha) Jan Buen, D-4th (W. Maui, Moloka‘i, Lana‘i), Jonathan Chun, D-7th (S. Kaua‘i, Ni‘ihau), Suzanne Chun Oakland, D-14th (Palama, ‘ülewa Heights), Lorraine Inouye, D-1st (Hawi, N. Kona, Waimea), Norman Sakamoto, D-16th (Moanalua, Salt Lake), Rod Tam, D-13th (Nu‘uanu, Downtown, Sand Island), and Kalani English, D-5th (Kahului, Upcountry Maui).

Voting no were Hemmings and Sen. David Ige, D-17th (Pacific Palisades, Pearl City). Absent for the vote were Sens. Cal Kawamoto, D-19th (Waipahu, Pearl City), and Donna Kim, D-15th (Kalihi Valley, ‘Aiea).

The bill now goes to the full Senate for a floor vote.

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