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The Honolulu Advertiser
Posted on: Friday, December 22, 2006

Rebate on taxes possible in 2007

By Treena Shapiro
Advertiser Government Writer

Republican Gov. Linda Lingle's repeated call for meaningful tax relief has a little more weight behind it this year because state law requires some sort of rebate for taxpayers.

Two years of strong economic growth have led to budget surpluses large enough to trigger a requirement that some of the money be returned to taxpayers.

However, the "relief" could be as little as a $1 rebate or credit, and economists, analysts and policymakers are not in agreement about whether the most meaningful use of the surplus would be to put it in taxpayers' pockets, spend it on state needs or set it aside in a rainy-day fund.

In her budget, Lingle said the refund should be significant enough to counter the high cost of living but did not indicate what type of relief she would pursue.

"It's still being put together," said her spokesman Russell Pang.

Lowell Kalapa, executive director of the Tax Foundation of Hawai'i, said elected officials could use the upcoming session to make substantive changes to the tax structure rather than just return a little money to every taxpayer.

"The credit, the refund thing, is almost a kind of insult to taxpayers," he said.

Kalapa suggests lightening the tax burden by doing away with an upcoming half-cent general excise tax increase and instead taking the half-cent out of the current general excise tax to help pay for mass transit. "I think that would go much further than any dollar or $100 rebate in the future," he said. "This is a great opportunity for the Legislature to reduce the burden on taxpayers."

Private and government officials estimate that the new tax surcharge could cost a family of four about $450 a year.

Carl Bonham, director of the University of Hawai'i Economic Research Organization, said he doesn't expect the state to return the entire budget surplus.

He thinks state officials should look to the 2005-2007 Tax Review Commission report that was submitted to the Legislature yesterday.

The commission has recommended a study to evaluate eliminating state income taxes and collecting the revenue through increases in the general excise tax instead. It also suggested indexing the standard deduction, personal exemptions and tax brackets for inflation.

But Bonham does not necessarily advocate returning the money to taxpayers if there are other things the state needs to spend it on.

"In some ways, it's hard to justify giving large rebates if there's unfinished business," he said. "Then, to play the devil's advocate, you have to say 'If there's unfinished businesses, why are we giving money away in other forms of tax credits?' "

First Hawaiian Bank consultant Leroy Laney said Hawai'i is one of the few states with both a sales tax and a general excise tax. "We have a reputation for being overtaxed, but it looks like in a lot of ways, taxes are going up, not down," he said.

However, with a slowing of the economy predicted, Laney said the healthy revenue growth of the past few years will slow down.

"If you're considering lowering taxes in this environment, it wouldn't be the optimum time from this standpoint," he said.

He suggests that one option would be to use the surplus to reduce the debt and curb future spending. "Reducing debt is not a bad way to do it," he said.

Reach Treena Shapiro at tshapiro@honoluluadvertiser.com.