Tax experts say plans to revive
Hawaii’s economy are...

‘A Pale Imitation’

Two advisers to the economic task force plan
say the bills before the Senate and House
won't make a difference

By Rob Perez
Star-Bulletin

Tax-reform measures causing a big stink at the Legislature won't do much to boost the state's ailing economy, said two mainland tax gurus who were invited to Hawaii last year to offer their advice.

Alvin Rabushka, senior fellow at the Hoover Institution in California, and William Fox, a University of Tennessee economics professor, said the House and Senate plans and the one recommended by Gov. Ben Cayetano would put money into residents' pockets.

But none of the initiatives likely would generate much new investment in Hawaii -- a critical factor for rejuvenating the economy, according to the two tax experts.

Rabushka even suggested that whatever measure passes would fall so short of the mark, especially given the expectations built by months of hype, that Hawaii's business image could suffer.

"All three plans are pale imitations of real tax reform," Rabushka said. "If this is the best you can do, Hawaii might be better off to downplay (whatever passes) rather than headline it."

Seiji Naya, Cayetano's point man on the economy, said the pair's comments seem inconsistent with their past writings.

"I'm a little bit surprised how they're reacting," Naya said, disputing their basic conclusions.

As lawmakers head into their final days of deliberation, those conclusions are bound to add to the already contentious debate on tax reform.

The House says its plan makes the most sense, the Senate insists its version is the best approach and Cayetano has pushed his Economic Revitalization Task Force recommendation.

Each plan has as its centerpiece a sizable cut in personal income taxes. The reductions range from 10 percent to more than 40 percent.

Proponents say their respective tax initiatives will save Hawaii households hundreds of dollars yearly, attract millions in new investments and create thousands of jobs.

But Rabushka and Fox, who were asked by the Star-Bulletin to assess the three proposals in the context of boosting the economy, said none are likely to make much of a splash.

The pair based their comments on a one-page summary of the plans compiled by the governor's office and sent to them by the Star-Bulletin.

Fox, who like Rabushka was invited to Hawaii in September to offer advice to task force working groups, wasn't as harsh as the Hoover fellow in his evaluation. But like Rabushka, he questioned the premise that the plans would revitalize the economy.

"I don't think you'll stimulate a lot in Hawaii by putting more money in people's pockets," he said.

Even though cutting personal income taxes is not bad policy and is consistent with what many other high-tax states have done, Fox said that strategy doesn't necessarily put Hawaii in a better position to attract businesses, especially the high-tech or information-oriented ones states covet.

The House and task force plans increase the general excise tax -- a significant cost to those kinds of businesses -- and none of the plans deal with the so-called pyramiding effect (essentially taxing a tax) of the excise tax, Fox said.

So while most other states do not tax goods and services that high-tech companies purchase to produce their final products, Hawaii still would tax them -- at multiple levels, he said.

Fox also questioned how much in tax savings the state's wealthier residents would reinvest in Hawaii, as opposed to Wall Street or other out-of-state ventures.

"I'd kind of wonder about that," Fox said.

"I can't say the tax cuts will have zero impact (on local investment), but I wouldn't expect a big one," Fox said.

Rabushka likewise questioned how effective the tax cuts would be in helping lure wealthy executives, entrepreneurs and upwardly mobile workers -- the very people a state needs to create more wealth, he said.

What would be more effective, he said, is a tax cut so bold -- like eliminating the personal income tax altogether -- that "everybody in the world knows the socialist Republic of Hawaii is becoming the capitalist Republic of Hawaii," Rabushka said.

As it is, "these packages won't get the time of day from anybody."

But Naya defended the task force and House proposals.

Though they aren't as strong as the original task force plan, either proposal would stimulate the economy by generating several hundred millions of dollars in investment annually, along with hundreds of new jobs, he said.

Naya said the Senate plan, which does not have an excise tax hike but has smaller income tax cuts, would result in job losses.

At a Senate hearing Tuesday, however, University of Hawaii labor economist Lawrence Boyd suggested the Senate plan would create 1,000 to 4,000 jobs annually.

Proponents say the Senate plan has tax credits and other features that will make Hawaii more attractive to investors.