TAXWatch: Making Up for Budget Shortfalls

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Let’s first start by stating the obvious.  We’re in trouble.

According to the latest forecasts put out by our Council on Revenues, we have a state budget hole of more than 2 billion dollars.

This has to be made up somehow.

The Legislative Auditor’s staff was busy at work trying to find idle cash parked in obscure special funds.  They found some, but raiding it will be a one-time fix.

The Governor is talking about furloughing employees for 2 days a month for four years, beginning in December, to shave roughly 10% off state payroll costs.  He has also asked the executive departments to come up with another 20% in cost reductions.

Not much has been said about “revenue enhancement,” things like increasing taxes, suspending exemptions, lopping off tax credits.  At least not yet.  We fully expect the Legislature, when it opens next year, to be flooded with revenue enhancement proposals.  The question then becomes which, if any, will have enough traction to go all the way through the legislative process.

One very important step that takes place before the Legislature convenes is, of course, the general election.  That’s when we find out who will be in the Legislature.

Once we figure that out, we then need to remember a few things if we’re going to think about how to balance the state budget.

About half of the operational spending from state government is considered fixed costs.  This includes interest payments on money that the State has borrowed in the past, and payments to support the retirement and health benefits that are due State workers who have vested in the benefits, whether or not they have left the State.  Governor Ige skipped this year’s payment to the retirement system and health fund, but it’s not something we recommend doing, and there is no way it can be done year after year.  We already owe our creditors and our workers, and the debts need to be paid.

A long time ago, soon after the new hotel room tax became law in 1986, state government committed to sharing some of its wealth with the counties.  The amount of this sharing has been the subject of fierce and ongoing debates over the last decade or so, but there always has been sharing.  Until May, that is, when the Governor by proclamation shut down the law that required our hotel room tax to be shared with the counties.  That move perhaps eased the problem at the State level but is now causing pain at the county level.

If and when lawmakers look to taxes as the means of patching the leak, they are going to find that only two tax types bring in enough money to make an appreciable dent in the budget:  the general excise tax and the individual income tax.  Most of you probably already knew that the general excise tax, which is imposed on all business in the State, brings in lots of money, primarily because it is imposed on almost everything that moves and may be imposed many times in the economic chain that leads up to the retail sale of a product or service.  What you might not have known is how much the individual income tax rakes in.  In fiscal 2019-20, for example, it brought in $2.3 billion compared with $3.4 billion in GET collections.  Of that, $2.1 billion came from withholding tax on wages.

We’re in trouble, and the way out of this mess is a complicated one.  How will the pain be shared?  If you have an opinion on the matter, you can go to the ballot box, you can speak with your elected officials, and you can encourage others to do the same.  Will you be one of the people who make things happen?  Will you simply watch what happens?  Or will you be part of the mass of people who have no idea what is happening?

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Tom Yamachika is the President of the Tax Foundation of Hawaii, a private, nonprofit educational organization dedicated to informing the taxpaying public about the finances of our state and local governments in Hawaii. Tom is also a tax attorney in solo practice and has been since early 2013. Prior to 2013, he was with the accounting firm Accuity LLP, which was formed in 2006 from the Honolulu office of Coopers & Lybrand (which later became PricewaterhouseCoopers). Before that, he served as an Administrative Rules Specialist in the State of Hawaii Department of Taxation from 1994 to 1996, where he drafted rules, interpretive releases, and legislation on several different state taxes. Prior to that, he practiced litigation and tax law with Cades Schutte Fleming & Wright in Honolulu.