General tax relief will bring across-the-board revitalization

By Ed Case

In the private sector, "hard decisions" refer to difficult choices required to survive. But in Hawai'i government, they connote politically hazardous alternatives that are better avoided.

Colleen Ikeda scans descriptions of job opportunities in the State Recruitment Office, State Office Tower. She's a former cosmetologist who retrained as a carpenter, then got laid off and now is looking for a job. Advertiser library photo • June 18, 1996

The hardest decisions in Hawai'i government today lie in economic revitalization and overall government costs.

This was true well before the Sept. 11 terrorist attacks. The local impact of our national tragedy merely turned the spotlight on difficult choices that have been avoided up to now. As we finally focus on those interrelated issues, let's look realistically at our situation, our practical options, and the best path for all.

Most of the money that pays for government programs such as education and public employee salaries and benefits is produced by the private sector. For example, our general excise and individual income taxes alone account for about 40 percent of all state revenues.

As our economy goes, so goes not only our ability to provide for ourselves and our families, but also our government's ability to provide collectively for all.

Our economy's vitality depends mostly on five factors. The first — economic health elsewhere, mainly on the Mainland and in Japan — is beyond our control. But the other four — local taxes and fees, local regulations and mandates, education quality, and physical/social/environmental infrastructure — are very much up to us.

Of the latter four, the most immediate obstacle, especially for the small businesses employing more than 60 percent of Hawai'i workers, is the tax/fee load. For example, we continue to rank in the top rung of all states in total state and county taxes and fees per person and also as a percentage of per capita income.

We have cautiously phased in some tax relief with some positive results. But we have avoided reductions that would bring across-the-board revitalization at the politically charged expense of high-cost government.

So predictably, now that economic revitalization is so crucial, the options are narrower and the decisions harder.

Specifically, our current two-year state general fund budget beginning July 1, 2001, increased authorized spending by more than 10 percent from the previous biennium. The largest increases were in Felix special-education spending and some $300 million in public-employee pay raises.

That increase was based on March 2001 projections by the Council on Revenues that state general fund revenues would grow by more than 11 percent in the same period. Those projections, which predicted short-term economic recovery on the Mainland and in Japan and independent growth here, were way too optimistic.

Sept. 11 obviously changed everything. On Nov. 14, the council revised its revenue projections for the 2001-2002 fiscal year from 4.1 percent to minus 0.7 percent. However, it left unchanged its roughly 5 percent per year growth projections for the next year and the following five "out years," apparently believing that the U.S. and Hawai'i economies would recover and the Japan economy would stabilize by mid-2002.

We can all hope that happens. But, even if it does, the impact on the state's current financial plan is still severe. Without increased revenues and/or reduced expenses, we would be more than $100 million in the red by June 30, 2003. And that's before we address the subsequent out years where, left unchecked, increasing costs will overwhelm even optimistic revenue growth.

Available options

How do we solve this latest fiscal crisis and break out of this rut to sustainable economic vitality and affordable government? These are the basic schools of thought:

• Tax increases. Some want to raise taxes and fees or otherwise generate additional revenue through means such as gambling. Their focus is on maintaining government programs and employment rather than economic vitality and its link to state fiscal health.

• Spending increases. Some want to increase government spending in the hope that it will stimulate the economy and, in turn, lead to increased revenues sufficient to pay for that increased spending and other expenses. Proposals to dramatically increase public construction spending are examples.

• Fund reallocation. Some want to redirect large specific-purpose funds toward maintaining general expense levels. Examples are the potential use of $200 million in the Hawai'i Hurricane Relief Fund and roughly $150 million a year allotted to state contributions to the state employees' retirement system.

• Tax/government cost reductions. Some want to provide further general tax relief and other financial incentives for economic revitalization. They view this as the only way to assure sufficient government revenues over the long term, while recognizing that it mandates reductions in government cost.

Hard decisions

Tax hikes are the wrong direction. They cripple economic vitality and, over time, our ability to fund core government programs. But, more basically, they perpetuate rather than solve our underlying problem, which is unsustainably high government costs.

Spending increases and fund reallocation also perpetuate the status quo. They are government-by-credit-card — one-shot remedies that when exhausted leave a highly leveraged state budget that is then even more exposed to external downturns.

Only across-the-board economic revitalization through general tax relief and similar means offers sustainable change for Hawai'i.

But this path requires reduced government costs, and any substantial economic revitalization proposal claiming otherwise is just talk. Such reductions require basic change in the focus and operation of government, and cannot avoid some noncore program and personnel reductions.

But they don't need to involve elimination of programs or employee layoffs if costs can be cut through increased efficiency, judicious use of privatization, furloughs and other means.

The upcoming 2002 legislative session and watershed election season beyond offer us all the ability to force the choices Hawai'i's future requires. We must not turn away.

Ed Case represents Manoa in the state House of Representatives and is an announced Democratic candidate for governor.