Posted on: Friday, April 18, 2003

Take that, Forbes! Hawai'i bites tax bullet

OK, it's much too early to start congratulating anybody at Hawai'i's Legislature. Anything can happen in the current session's waning days.

But news that the state House is killing proposals for some $300 million in tax increases — even as some major tax credits remain alive — is something of a wonder.

Bear in mind that nearly every American state is in dire fiscal condition — their combined budget shortfall is forecast at $30 billion this year and $82 billion next year. Because all states except Vermont must balance their budgets, most will be increasing taxes substantially even as they make deep budget cuts. (Example: New York City is asking its state legislature to reinstate a $1.4 billion tax on workers who commute into the city, without which it contemplates 10,000 layoffs among police, education, corrections and sanitation workers.)

But not Hawai'i, the state that conservative Forbes magazine likes to razz as a "tax hell." As things stand now, Hawai'i faces painful budget cuts — although lawmakers are struggling to restore some of them, particularly to public schools.

But the House has killed, in effect, measures that would have allowed a new 1 percent county sales tax, a 12.5 percent increase in the general excise tax and an increase in the state vehicle registration tax from $5 to $10. (Still alive is a desirable long-term-care health insurance plan that would tax residents $120 a year, but eventually return that money, less administrative costs, in benefits.)

The House has also killed tighter restrictions on Act 221, the state's high-tech tax incentive, which would have added some $55 million to state tax revenues. Important credits for hotels are also alive. (The Senate is ready to give up on the GET increase, but still thinks the Act 221 modification is needed.)

This seeming bravado in the face of an economy threatened by tourism slackened by 9/11, the Iraq War and the SARS scare follows on the heels of the Cayetano tax cuts, which are saving taxpayers about $2 billion over six years.

How can Hawai'i government hold the fiscal line in the face of such terrible fiscal conditions, when other states are increasing taxes?

The honest answer is, perhaps it can't.

Consider the warning from Senate Ways and Means Chairman Brian Taniguchi that the Council on Revenues, when it meets early next month, may lower its current revenue growth estimates "by at least 1 percent." Taniguchi is one of the players who's having a hard time seeing how cuts to schools and social services are going to be avoided without increased taxes.

If lawmakers succeed in doing just that, perhaps one explanation will be a new chemistry between Republican Gov. Linda Lingle and a tax-averse House.

But don't underestimate the gamesmanship of House Speaker Calvin Say, who says the state can do without tax increases because he believes Lingle can cope with bad news in the coming budget year through measures already approved, as well as further internal budget cuts.

Is Say setting Lingle up to take the fall for the disappointment of either major tax increases or major cuts to essential programs like education and social services? By all but killing tax increases, Say leaves a budget gap of hundreds of millions of dollars.

It's his responsibility, every bit as much as the governor's, to identify the budget cuts that must now be made, without drawing blood.