Tuesday, February 10, 1998

Moody’s cautious
on state tax plan

The bond agency says
the link between tax changes and
economic development is iffy

By Rob Perez

The major tax changes proposed by Gov. Ben Cayetano's economic task force likely will deepen Hawaii's short-term financial problems with no assurance they'll lead to long-term economic development, an analyst for one of the nation's major credit-rating agencies says.

Robert Kurtter, senior vice president for Moody's Investors Service and its lead analyst on Hawaii, yesterday said the revised tax plan crafted by Cayetano on behalf of the Economic Revitalization Task Force will mean significantly less tax revenue -- $73 million the first year -- for a state already projecting substantial fiscal cuts over the next several years.

But the relationship between tax changes by a state and economic development "has always been a tenuous one," Kurtter said from his New York office. "We rarely see a state make dramatic changes (in the economy) by changing tax structure."

Kurtter and other Moody's officials met Friday in San Francisco with Cayetano, Senate President Norman Mizuguchi and House Speaker Joe Souki.

The three political leaders, in an unusual show of unison, also discussed the task force plan with analysts from Standard & Poors, the other major credit-rating agency.

Elected officials have to decide what makes wise tax policy, Kurtter said.

But counting on a boost to the economy from tax changes is risky, he said.

"Don't come and tell us as a result economic development is going to surge," Kurtter said, later adding: "We'll believe that when we see it."

Cayetano bristled at Kurtter's remarks, saying the analyst was incorrectly looking at the tax recommendations in isolation.

The recommendations are the centerpiece of a multi-faceted package proposed by the 26-member task force as a way to turn around Hawaii's economy. The tax plans calls for major cuts in income taxes and a nearly 19 percent increase in the general excise tax to offset some revenue loss.

"No one is saying this is the panacea," Cayetano said in a phone interview.

But the entire package -- along with other initiatives the state is taking -- is important in changing the image of Hawaii as a bad place to do business, he said.

"We need to go that extra mile to show people outside (the state) that Hawaii's business climate has changed and we want businesses to come in," the governor said.

Cayetano's top official on the economy, Seiji Naya, has cited the tax changes in particular as a way to stimulate job growth and new investment.

But, Cayetano acknowledged, "there's no guarantee on anything."

The views of Moody's and S&P are important because they rate Hawaii's credit worthiness, helping determine how much the state pays to borrow investor funds.

Souki said the analysts "gave a severe warning that some adjustments need to be made to the (existing) tax structure."

Peter Bianchini, who heads the team of S&P analysts who follow Hawaii, said the state will have difficulty balancing its budget facing a $73 million cut in revenue.

Both analysts said Friday's meetings were a positive sign that Hawaii political leaders agree on how to tackle the state's economic problems.

"It helps a lot to see there's a common understanding and vision," said Kurtter.

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

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