Experts split on
Hawaii’s recovery plan

The income tax cut gets high marks,
but one analyst sees only modest
benefits resulting

By Rob Perez
Star-Bulletin

Hawaii easily would have the most effective sales-tax policy in the nation if the state task force's proposals to revive the economy are approved, the head of the National Tax Association says.

"If these changes are adopted, you'd have the best sales-tax structure in the country without a doubt," said William Fox, a University of Tennessee economics professor and president of the national organization that focuses on public-financing policy.

Fox was one of several outside experts whom the Economic Revitalization Task Force invited here in September to suggest ways to kick-start the economy.

In phone interviews last week, Fox and another of the experts lauded the task force recommendations unveiled last month. A third expert said the proposals don't go far enough.

On the tax front, the task force wants to slash personal and corporate income tax rates 40 percent and 50 percent, respectively, and raise the general excise tax nearly 34 percent. The task force also proposes a 17 percent increase in the hotel-rooms tax.

Additionally, the panel recommends a reduction in the pyramiding effect of the excise tax, taxing imported services and exempting exported services.

The changes would shift more of the tax burden from income to consumption, giving Hawaii the broadest-based consumption tax in the nation and making the state's tax policy more consistent with a service-based economy, Fox said.

Unlike Hawaii, other states have narrowly based consumption taxes, with few services subject to the taxes, he said. Those states would benefit by emulating Hawaii's shift, Fox said.

Though the task force package has been criticized by advocates for low-income people, Fox said the two low-income tax credits should help offset the rise in the excise tax, which would hit the poor especially hard.

"I think these are really a very good set of recommendations," said Fox, who served as a visiting professor at the University of Hawaii in 1992.

'Doesn't go far enough'

But Alvin Rabushka, a senior fellow at Hoover Institution, a conservative think tank at Stanford University, said the proposed changes don't do enough to fix the structural problems affecting Hawaii's economy.

"From the standpoint of being a first step, this looks pretty good," said Rabushka, who specializes in public financing issues. "From the standpoint of the long term, it doesn't go far enough. But that may reflect the political reality of Hawaii."

When Rabushka was here in September, he recommended eliminating the income tax entirely or at least cutting it in half and possibly raising the 4 percent excise tax by a couple of percentage points.

Lowering the top rate of the personal income tax from 10 percent to 6 percent over three years probably will do little to attract skilled workers and outside dollars to the economy, he said.

"If you're trying to be bold, I think you need to be bold," Rabushka said. "These proposals are very conservative."

The biggest weakness in the package, he added, was that it skirted the issue of cutting the size of government. Because the recommendations fail to set a specific level by which the state must reduce expenditures, the government won't be forced to become more efficient with taxpayer dollars, Rabushka said.

What revenue reductions result from the proposed changes should be absorbed by the state without the need for significant manpower cuts, he added.

The danger is that the overall package, if adopted, would result in only modest benefits, taking the steam out of calls for reform until the next severe economic downturn, according to Rabushka.

Likes tax, permit changes

Robert Ady, executive consultant with Fantus Consulting, the nation's largest company specializing in corporate relocations, views the task force proposals in a more favorable light.

The tax changes and the setting of time limits for permit approvals will get the attention of companies that otherwise wouldn't be interested in considering Hawaii for a business site, Ady said.

"These are some significant changes that are going to be very positively received by the outside world," he said.

The permit proposal sends the strongest message, largely because of Hawaii's reputation for having an extremely long and unpredictable government-approval process, Ady said.

The task force package will be considered by the Legislature in the session starting in January.

If the package is changed much, that could dilute it to the point of being ineffective, Ady cautioned.

"It would definitely diminish its competitive importance," he said.

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