By George F. Lee, Star-Bulletin

Ray Kamikawa, state tax director, said Cayetano's
proposed tax reduction would be phased in over three
years. He said the governor's goal is "to ease the tax
pain" on individuals and small businesses. Cayetano
proposes cutting taxes up to $250 million.

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Cayetano wants
another state income
tax reduction

Officials ask where the money
to cover lost revenue will be found

By Mike Yuen
Star-Bulletin

Gov. Ben Cayetano wants the state's just-lowered personal income tax even lower.

But key legislators and a tax watchdog wonder where Cayetano will find the extra $200 million to $250 million to cover the revenue that would be lost by gradually cutting the state's highest personal income tax rate an additional 1 percentage point.

Cayetano is targeting the year 2002, when a tax rate of 8.25 percent is to go into effect. He now wants to drop that rate to 7.25 percent.

The proposed tax reduction also includes a corresponding drop in all other tax brackets.

Just six days ago, the state's highest personal income tax rate was 10 percent, before falling to 8.75 percent.

The cuts over three years that Cayetano is now urging comes on top of the four-year, $759 million personal-income tax break that went into effect when the new year began.

That means if Cayetano is successful with his latest initiative, he could boast of having provided isle taxpayers with about $1 billion in tax cuts.

He always thought that last year's tax breaks, which the Senate majority initially resisted, were much too small, Cayetano said.

"Reducing taxes is always a good idea," said Lowell Kalapa, president of the Tax Foundation of Hawaii. "But the real question is, given Cayetano's financial plan, where is the money going to come from?"

That sentiment was echoed by House Speaker-elect Calvin Say (D, Palolo) and Senate Ways and Means Co-Chairman Andrew Levin (D, Volcano).

Kalapa wondered if the state's $1.1 billion settlement over 25 years with the tobacco industry might be used or if excess special funds might be diverted.

Cayetano said he has several proposals to generate additional revenues for the state, but he declined to say what they were.

"This is something we think we can handle," Cayetano said. "It's something that is really important for us to attract high-tech people. The tax structure makes a big difference, especially the personal income tax structure."

Hawaii will not recover from its prolonged economic doldrums and attract new businesses unless it can provide incentives, Cayetano added.

"We need to move in this direction, otherwise nothing will change. I hope the Legislature got the message from the last election. It basically was: People want change," Cayetano said.

State Tax Director Ray Kamikawa said the proposed income tax reduction would be phased in over three years. In each of the first two years, 2000 and 2001, the personal income tax rate would be cut 0.25 percentage point. Then in 2002, it would be cut 0.50 percentage point.

Cayetano's goal, Kamikawa said, is "to ease the tax pain" on individuals and small businesses.

Most operators of isle small businesses file personal income tax returns, not corporate income tax forms, Kamikawa said.

Cayetano also said some union officials have been urging him to rescind the state's payroll lag, which means state workers are now paid after they have completed their work week, as is done in the private sector.

Under the old system of paying workers before they finished their work week, the state has run up a salary overpayment tab of $3.3 million, as of October, the latest month for which figures are available.

Cayetano he may be willing to lessen the five-day lag to three or four days if the public workers unions agree to the repeal of a state regulation that requires the state to go through "a convoluted hearing process" used when a state worker contests the state's claim of overpayment.

"We virtually go through a trial to resolve that," Cayetano said. If the unions agree to a less complicated process, changing the regulation can be done administratively, he said.

Cayetano added that he will be proposing to the Legislature changes to civil service rules and laws to get greater flexibility and efficiency in government. He declined to provide details.