The time is fast approaching when we will learn if Gov. David Ige meant it when he said that tax hikes are “the last thing” our state needs right now.
During the 2021 session, Hawaii legislators introduced various tax increases, many of them in the notorious Senate Bill 56, which would have given Hawaii the highest income tax rate in the nation. Most of the tax proposals fell by the wayside, but when the dust settled, there still were a handful of potentially very damaging hikes that made it to the governor’s desk.
Now, the governor has to decide whether to let those measures become law. They include proposed increases in the conveyance and rental car taxes, suspension of certain general excise tax exemptions, and allowing the counties to add for their own use up to 3 percentage points to the state’s transient accommodations tax.
The governor dismissed the idea of new taxes earlier this year because of the better-than-expected economic forecast by the state Council on Revenues and the expectation of considerable federal COVID-19 aid, which combined were enough to allay concerns about balancing the state budget.
Nevertheless, supporters of tax increases argue they are needed to help rebuild the state’s rainy day fund. They also claim these kinds of hikes won’t be felt by the average Hawaii resident. Or they are needed to promote tax “fairness.”
Unfortunately, none of these claims are true. The rainy day fund is for times like these, and we should worry about rebuilding when the sun is out, not while it’s still raining. All taxes affect the economy, some in more obvious ways than others. And “fairness” is belied by the haphazard nature of the increases and exemption denials now on the governor’s desk.
Increasing the conveyance tax for high-value properties, for example, would directly affect development of affordable housing projects, multifamily rentals, residential subdivisions and mixed-use properties. It would ripple through to housing and development at a time when housing costs already are sky-high.
Tax increases affecting the visitor industry would be especially poorly timed, as tourism is expected to take years to recover from the pandemic lockdowns. Even those who don’t work directly in the tourism industry are affected because their neighbors, family, friends and customers are dependent on tourism to thrive. Under the circumstances, the state should avoid placing any additional burden on tourism.
Regarding the suspension of GET exemptions, 31 were proposed in SB 56. But after being pulled from SB 56 and shoved into House Bill 58, only a ragtag group of 11 remain. There appears to be no rationale connecting them, leading us to think they will simply carpet-bomb random sectors of the economy.
Taxes operate as a brake on the economy. Any short-term revenue gain carries short- and long-term costs flowing from the overall economic impact of that tax.
If the policy goal is to increase state revenues, the most effective strategy is to focus on growing the economy. Currently, Hawaii’s economy is in such a fragile state that even small gains can have high rewards. The government could raise far more revenues through statewide economic growth than it could through tax increases.
Reasonable minds might differ on whether there’s ever a “good time” to raise taxes. However, if we want Hawaii to recover from the Great Lockdown Crash of 2020 quickly, now is an especially bad time. Hawaii residents already have one of the highest tax burdens in the country, and recovery will be difficult enough without adding to that burden.
Ige was right when he said that more taxes are the last thing we need right now. Let’s hope he remembers that.
Keli‘i Akina is president and CEO of the Grassroot Institute of Hawaii. Tom Yamachika is president of the Tax Foundation of Hawaii.
