Dividend tax cut could cost Hawai'i $30M
By Sean Hao
Advertiser Staff Writer
President Bush's plan to spur the economy by eliminating dividend taxes would cost Hawai'i $30 million in lost revenues, according to a Washington D.C.-based policy group.
All states, many of which are awash in red ink, would lose $4.5 billion in tax revenues, forcing them to cut services and raise taxes — moves that would have the most impact on poor people, according to a report released yesterday by the Center on Budget and Policy Priorities.
Bush this week said his 10-year $670 billion proposal would give the economy an immediate boost and create 2.1 million jobs over the next decade. However, if Hawai'i had not taxed dividends in 2000 — the year of the most recent available statistics — it would have resulted in $30 million less revenue, according to the state-by-state analysis by the center, which lobbies for low-income families.
Should Bush's economic growth plan go through, states won't be forced to stop taxing dividends. Still, many, including Hawai'i, typically keep their tax policies in line with the federal government's. Any such change would require state Legislature approval.
Whether the Bush's plan would actually cost state coffers $30 million is unclear, according to a state tax official.
Cathleen Tokishi, a spokeswoman with the state Department of Taxation, said the agency is in the process of determining the revenue impact of Bush's plan and could not yet comment on the policy group's report.
If the figure is accurate, the revenue loss would not aid efforts to shore up the state's already hemorrhaging budget.
Gov. Linda Lingle, a Bush advocate and fellow Republican, was reviewing the report yesterday and was unable to comment immediately, said spokesman Russell Pang.
Bush administration officials maintain that eliminating the so-called double taxation of dividends would boost the economy by $20 billion this year and that ultimately would benefit states, said White House spokesman Ari Fleischer.
Bush "is very sympathetic with the needs of the states," Fleischer said. "The policies he announced are designed to give a boost to the economy which, as history has shown, will return money into state coffers."
However, Bush's plan has drawn heavy criticism from leading Democrats as well as some economists.
Apart from cutting tax revenues, Bush's plan also would increase the burden on states by driving up interest rates and the cost of borrowing money, said Iris Lay, deputy director for the Center on Budget and Policy Priorities.
That's because tax cuts would increase the national debt, forcing the government to borrow more. To compete with other types of bonds offered by corporations and municipalities, government notes would have to offer higher rates of return, Lay said.
Additionally, eliminating taxes on dividends makes stocks more attractive in relation to bonds. That means "money will move from bonds into stock," she said. "That will force bond prices down, which forces interest rates up,"
Byron Gangnes, a University of Hawai'i economics professor and member of the UH Economic Research Organization, said concerns about higher interest rates from the Bush plan are valid.
A more direct way to stimulate the economy would be to give money back to cash-strapped states and to middle- and low-income families, he said.
"It seems to me a dividend tax has more effect on the wealthiest" who are less likely to spend money, Gangnes said. "We know that people who are not wealthy have a very high propensity to spend. They're more likely to spend it buying goods and services.
"If you really wanted to stimulate the economy, you wouldn't do it this way," Gangnes added.
Bloomberg News Service contributed to this report. Reach Sean Hao at shao@honoluluadvertiser.com or 525-8093.
