Tax changes still
don’t satisfy foes

Gov. Cayetano's revisions
to the proposed tax overhaul don't
go far enough, they say

By Rob Perez
Star-Bulletin

Good but not good enough.

That was the general reaction from opponents to Gov. Ben Cayetano's latest proposal for overhauling Hawaii's tax system.

Cayetano, in an unusual appearance before the Senate Ways and Means Committee yesterday, offered substantial revisions to the tax recommendations in his Economic Revitalization Task Force plan to boost the economy.

To address criticism focused on the most controversial element -- a nearly 34 percent rise in the general excise tax -- Cayetano proposed only a 19 percent hike, which would raise the tax from 4 percent to 4.75 percent. The old plan called for a 5.35 percent excise tax.

The other revisions also were aimed at dealing with major criticisms of the old tax package.

Through an expanded credit, Cayetano wants to give tax breaks to most retirees, a group clearly hurt under the previous plan. He also proposes lessening the breaks for corporations and wealthy residents and providing the biggest income-tax cuts to lower- and middle-income households.

While critics lauded many of the revisions, saying such changes would make the tax package fairer, they vowed to continue opposing any increase in the excise tax.

"Even an increase of .75 percent is unacceptable," said Cindy Rasmussen, president of the Kalihi Business Association.

Added Richard Rowland, owner of a life insurance business: "If you take something that is extremely negative and take out some of the negativity, it's a little better but still negative."

Cayetano administration officials, however, said raising the excise tax in conjunction with the largest income tax cut in state history was the best way to provide tax relief and stimulate the economy without having to drastically chop government services.

The governor also noted that tourists pay about one-fourth of excise taxes, effectively lessening the burden on residents.

"Now everyone will get a real tax cut, pure and simple, because the income tax cuts and tax credits are larger than the excise tax increase," Cayetano said.

But critics said already-struggling small businesses still would suffer from the smaller excise-tax increase, particularly if they can't pass the entire hike onto customers.

"The more I look at the numbers, the more I see it's going to really hurt business, rather than help," said Lowell Kalapa, head of the Tax Foundation of Hawaii.

The administration said the revised package would mean $73 million less tax revenue to the state in each of the first two years and $173 million less in the third year when the full tax cuts take effect.

Under the old package, the revenue loss was projected to be $100 million in each of the first two years and $200 million the third.

While the old plan provided a 40 percent across-the-board reduction in personal income taxes, the revised version recommends smaller cuts once household income hits $60,000 -- one of three new high-income brackets created (the two others would be $80,000 and $100,000).

The smaller cuts would range from 25 percent to 35 percent, with the smallest reductions going to households making $100,000 and above.

Those earning less than $60,000 still would get the 40 percent cut.

The new plan also replaces the two low-income tax credits under the original package with a single credit that is higher in value and applicable to more people. The credits would be doubled for retirees 65 and older receiving up to $50,000 in pension income.

For corporations, the new package is not as generous. Corporate income and franchise tax rates would be cut 30 percent, not 50 percent as previously proposed.

Seiji Naya, director of the Department of Business, Economic Development and Tourism, said the revised package likely would create 2,500 to 5,200 new jobs a year -- figures skeptics question.

Legislators had mixed reactions to Cayetano's recommendations.

Sen. Rosalyn Baker (D, West Maui-Molokai-Lanai), co-chair of Ways and Means, said the changes were more in line with Senate sentiment. "That was clearly where the Senate was heading," she said.

State officials meet with bond raters Associated Press Gov. Ben Cayetano, House Speaker Joseph Souki and Senate President Norman Mizuguchi are in San Francisco to see what some outside experts think about their economic recovery plan. The three state leaders will meet with officials of Moody's Investors Service and Standard & Poors, the nation's top two bond rating services, the governor's office said. The services determine what the state should pay for borrowing money -- a decision that can cost or save the state millions of dollars in interest payments. Bond buyers look at the ratings when they decide how much interest the state should pay them. "These meetings with our bond raters at Moody's and Standard & Poors gives me the opportunity to talk about the state's fiscal picture and our tax package currently being considered by the Legislature," Cayetano said. Souki and Mizuguchi are joining him because it's important they all get a perspective on their financial plan from respected outside sources, he said. The governor is scheduled to return this weekend. At this time last year, Moody's raised concerns about the high-grade rating for Hawaii government bonds, but didn't lower it. At the time, Moody's noted a slow recovery in tax revenues and higher labor costs that had eroded budgetary reserves and increased reliance on one-time measures.

But Sen. Sam Slom (R, Hawaii Kai-Aina Haina), a Ways and Means member, said the GET increase makes an otherwise favorable plan unacceptable.

"There's just too much opposition to that," said Slom.

Rep. Calvin Say (D, Palolo Valley-Kaimuki), House Finance chairman, likewise said House members still have concerns about the GET proposal. "A tax increase is a tax increase," he said.

Mayor Jeremy Harris said he opposes any GET increase. He said the county would have to raise property taxes to offset the $24 million the revised task force plan would cost the county in lost hotel-room tax and a higher GET bill.

"By increasing the excise tax and taking away the hotel-room tax from the counties and all the rest, they're just going to be shifting the tax burden," Harris said.

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Star-Bulletin reporters Gordon Y.K. Pang
and Craig Gima contributed to this report.

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Full text of the Governor's
Economic Task Force recommendations.