Tax reform bill
‘won’t help much,’
experts say

Economists feel the
result will be only a mild boost
for the isles

By Rob Perez
Star-Bulletin

The tax-reform measure the Legislature is expected to adopt tonight will provide only a mild boost at best to Hawaii's struggling economy, mainland tax experts and economists say.

Some say legislators fell well short of the economic-revitalization mark, doing little to cut direct costs of doing business here.

The experts cited the failure to pass a corporate income tax cut, to reduce the so-called pyramiding effect of the general excise tax and to exempt exported services from the GET -- all recommendations of Gov. Ben Cayetano's economic task force.

"They missed the boat by not doing much on the business side," said Neil Bruce, a University of Washington economist.

"If Hawaii really wanted to do something to revitalize the economy, they should have taken steps to make the state a business haven," especially for industries it wants to attract.

The tax package that legislators are scheduled to vote on tonight is so diluted from the one originally recommended by the Economic Revitalization Task Force that one expert called it laughable.

"It's a watered down version of watered down versions," said Alvin Rabushka, a senior fellow at Stanford University's Hoover Institution. "It won't do anything (to revitalize the economy). It will be a complete bust."

What raised particular concern among economists here and on the mainland was elimination of a provision exempting exported services from Hawaii's 4 percent excise tax. Hawaii already grants such an exemption for exported goods.

The services exemption was recommended by the task force and was included in House and Senate tax reform versions going into 11th-hour negotiations. When a compromise was crafted late Monday night, however, the services provision was not included.

The exemption would have meant Hawaii architectural, engineering, telecommunications and other firms would have been on more equal footing with businesses from most other states in competing for service contracts outside Hawaii.

The exporting of technical and management services is a niche that proponents say holds great promise for Hawaii, especially in the Pacific Rim and Asia.

But deletion of the provision makes no sense and will only hurt efforts to nurture that niche, experts say."It seems idiotic to say the least," said David Ramsour, a local economic consultant. "This is truly the most irritating, frustrating and bewildering part of the whole package."

The reforms call for income-tax cuts ranging from 17.5 percent at the top rate to roughly 20 percent to 30 percent at middle- and lower-income levels. Brackets also would be expanded so the top tax doesn't kick in until over $40,000 for an individual filer and over $80,000 for a couple.

That compares with a 40 percent across-the-board reduction the task force originally recommended.

The task force also suggested a 50 percent cut in corporate income taxes and a nearly 34 percent increase in the excise tax to partly offset lost revenue from the tax relief.

But none of those task force proposals survived. The magnitude of the tax cuts was substantially pared because the Senate refused to go along with a House plan to raise the excise tax.

The mainland experts said the tax relief that survived should help the economy but not by much.

"Getting down taxes is one step in the right direction," said William Fox, an economics professor at the University of Tennessee.

Fox and Rabushka visited Hawaii last year at the invitation of the task force to provide suggestions for changing the tax system.

How the eventual changes are perceived outside the state is important as Hawaii tries to attract outside investment, a critical component for boosting the economy.

Fox and Mike Schuyler, Washington, D.C.-base economist with the Institute for Research on the Economics of Taxation, said the tax cuts will ease the disincentives Hawaii's high tax rates now present for working extra hours or saving additional funds.

And since most of Hawaii's small businesses are taxed according to personal -- not corporate -- income tax rates, the cuts will mean eventual savings for those businesses, experts said.

The savings may be used for expansion or to open new businesses, providing a small boost to the economy, they said.

"You needed major improvements and it sounds like you're getting minor ones," Schuyler said. "The effect is not going to be that great but it's a positive step."

Some experts were much more cynical.They said the savings are so small and stretched over such a long period in the future -- the cuts take effect starting in 1999 -- that the economic stimulus will be negligible.

What's more, they said, a sizable cut would have been more effective if it was retroactive to the beginning of this year, while the economy is suffering, not in several years, when the economic picture could be much better.

"The timing is completely messed up," Ramsour said. "All of the effect will come just as the economy least needs it."

Lowell Kalapa, president of the Tax Foundation of Hawaii, also was unimpressed.The tax measure "is not enough to create new jobs. It's not enough to change the perception of Hawaii as a poor place to do business," Kalapa said.

But Bradley Mossman, a key administration lobbyist, said even the pared-down tax-reform measure represents the largest cut in state history.And that will help the economy, though not as much as the original task force recommendation, Mossman said.

Kalapa said the tax cut would be the largest in state history because it would be the only one thus far.A 1987 drop in the top rate from 11 percent to 10 percent wasn't really a cut because people effectively paid the same or more in taxes, thanks to a corresponding broadening of the tax base, he said.