Is Hawaii a Tax Hell?
Price of Paradise · Hawaii Public Radio · aired 1993-09-01
Guests: Lowell Kalapa (President, Tax Foundation of Hawaii); Jack Suyderhoud (Professor, University of Hawaii)
Duration: 00:30:38

[00:00:00] Randall Roth: Good morning. I'm Randy Roth, host of the Price of Paradise radio show. Low is the president of the Tax Foundation of Hawaii, and Jack is a professor of Decision Sciences at the University of Hawaii, as well as former executive director of the State Tax Review Commission. Low, is Hawaii a tax hell?
[00:00:21] Lowell Kalapa: Well, you might want not want to think that if you're dead. But of course, even for the state of Hawaii, they tax the dead as well.
[00:00:28] Randall Roth: What do we mean by tax hell?
[00:00:30] Lowell Kalapa: I think where we are paying more than we can truly afford for state government and high taxes and little known and unsuspecting high regulation, a lot of regulation by state government.
[00:00:44] Randall Roth: When you say that the level of taxes is too high, isn't the level of taxes a reflection of community values? Hasn't the community indicated that it wants high taxes and high services?
[00:00:55] Lowell Kalapa: I think there's a miscommunication, if you will, or misunderstanding of misperception between what is high taxes and what is high value for public services. To often we find that people don't understand what they're getting for their money, mainly because they don't know where their money's going. This has led to sort of an apathetic outlook toward government. We don't care, well we pay our taxes anyway. So, in that respect, there is sort of a missing two ships going past each other in the middle of the night and missing each other.
[00:01:26] Randall Roth: So taxes are maybe higher than a lot of people realize?
[00:01:30] Lowell Kalapa: I think so, Randy. I think there an awful lot of people that see the 4% at the grocery check-out stand and they kind of grumble about it, and they don't really see some of the other taxes that we have to pay indirectly, mainly because they're imposed on businesses. Hawaii tends to be a very quote unquote anti-business state, imposing a lot of the tax burden on businesses and the individuals don't realize that they're paying it indirectly through the cost of goods and services that they buy. The property tax is probably the best example.
[00:02:00] Randall Roth: So you're saying a lot of the taxes that get paid get paid in the form of higher prices of goods and services?
[00:02:07] Lowell Kalapa: For example, like I said, that property tax. We have tended to favor homeowners because homeowners vote. They tend to be the constituents of the elected official and, as a result, the county councils and the mayors have recommended shifting or putting higher tax rates on nonresidential properties like commercial or hotels resorts, who in turn turn around and impose those higher taxes in the form of higher prices at the grocery store.
[00:02:36] Randall Roth: Jack, Low thinks that we live in a tax hell. Do you agree?
[00:02:41] Jack Suyderhoud: Well, I live in the same place and I sometimes, certainly about the last two weeks of April, I agree with that. My feeling is that we probably live in a tax purgatory. In the sense that I think that things are bad here with regard to the way in which taxes are levied and the amount of the taxes. But I don't think that they are to the point where we can characterize them as hell. I think there are some aspects of the tax system that are disturbing to me, hellish to some, but I do not consider it overall as tax hell.
[00:03:22] Randall Roth: What's on the top of your list of those things that trouble you about our tax system?
[00:03:28] Jack Suyderhoud: I'd say first of all the the overall level of taxes is is relatively high, and it troubles me that we are living in a state where revenues are so high, our revenue system is so productive that it's resulting in lots of money or has resulted in lots of money flowing into state government without very much responsibility on how it's spent. And the fact that it's been almost automatic that there haven't been any tax increases has basically permitted state government to get away with this.
[00:04:03] Lowell Kalapa: I think that's very true, Jack, in the sense that our system is very highly progressive from the standpoint on the income tax. Unfortunately, it's so progressive that it, for example, kicks in and personal income tax bases at a very low level of income and as a result, most of us, if not a good large percentage of us, 99.44 100% maybe, pure, pay the maximum personal income tax rate and as a result that money just flows right in.
[00:04:32] Lowell Kalapa: The other the other bad one, I think, is the general excise tax. That 4% tax is often mistaken for a sales tax and you and I know darn well that that's not a sales tax, that's a gross receipts tax and it's imposed on everything that moves around here. Every transaction that takes place.
[00:04:49] Randall Roth: Low, if if we had to replace our excise tax system with a conventional sales tax system, how big a rate would we need to have in order to generate the same revenue?
[00:04:58] Lowell Kalapa: Well, not only our office, but national experts as well. The some of the leading experts in the sales tax area agree that if we went to a retail sales tax, as you would find on the mainland, we would need a tax rate of something like 11%, retail sales tax rate, to generate the same kind of money we get from our 4% general excise tax.
[00:05:19] Randall Roth: Jack, the Tax Review Commission that you were the executive director of throughout the figure 20%. Is that because things were different back then in the mid-80s, or is there just differences of opinion as to how high the rate would have to be?
[00:05:31] Jack Suyderhoud: I think there're just differences of opinion on how high the rate would have to be. It's just difficult to estimate exactly what kind of revenue would result if you applied a national average sales tax base here. I think um, getting back to this issue of tax hell, let me play the devil's advocate in a sense. And um, say that while the general excise tax is indeed a revenue monster in the sense that it can generate revenues at an almost unbelievable amount with a very, very low rate, it has some very attractive features. It's frankly a very simple tax. It's a tax that's broadly levied and there are very few exclusions.
[00:06:14] Jack Suyderhoud: Most states with excise taxes or sales taxes envy ours, in the sense that they do not have, or excuse me, they would have to fight very tough political battles to have a tax that's as broadly based as ours is. I think that some of the inequities of the excise tax, such as the tax on food, are problematic. I think our credit system on the income taxes help offset those inequities in a relatively efficient way. That overall, I would judge the general excise tax as being a monster, but I think one that we can live with.
[00:06:54] Lowell Kalapa: Let me point out that the 20% rate we agreed to, I think the 20% rate is agreed to from the standpoint of if you took the largest portion of the retail sales tax base out, and that is food. If you had a system like the California system, which does have a number of exemptions in the food area, the rate we would then need, that is if we exempted food from our retail base, would be something like 20% to generate the same kind of revenues.
[00:07:20] Lowell Kalapa: On the other hand I will say contrary to what Jack believes as far as inequities in the taxation of food, I'm glad we do. I'm glad we tax food because, in a sense, that makes the tax a little bit more accountable. Every time you create an exemption, you create a new group of people who become disinterested, apathetic. They could give a darn about government because they're not paying the tax. And I think Randy, I think that's one of the reasons why that half percent proposal to fund mass transit failed so miserably is because so many people suddenly realized that yes they would have to pay more.
[00:07:57] Lowell Kalapa: And that suddenly became the majority of the population and the resistance was there.
[00:08:02] Randall Roth: I think what I hear you both saying is that our excise tax system isn't a bad system, but it's a very powerful system and it's generating an awful lot of revenue.
[00:08:11] Lowell Kalapa: I don't think you can argue with the fact that it's generating an awful lot of revenue. It's the largest revenue source for our state government. It's the primary source if you look at it in this way for education which is unusual for compared to most other states.
[00:08:28] Randall Roth: You're listening to the Price of Paradise radio show. I'm Randy Roth, and my guests this week are Low Kalapa from the Tax Foundation of Hawaii and Jack Seiderhoud, a professor of Decision Sciences at the University of Hawaii. Low, you suggested earlier that perhaps we should be able to do at least as good a job with less revenue.
[00:08:49] Lowell Kalapa: I think part of the problem has been especially in the last few years when we've been rolling in dough, so to speak. I mean all the money that we could ever wish for. We have tended to believe that the pit was bottomless and therefore the money could just be doled out for whatever kinds of programs or projects that were proposed.
[00:09:09] Lowell Kalapa: One of the contributing factors to this, I think, is the political system in the sense that we had when we went to a one member district type setup or single member districts have really contributed to a very myopic viewpoint on the part of the legislature to problems that are more specific rather than global and as a result, if you get 51 House districts and 25 senatorial districts, with each with their own types of problems, you multiply the number of programs and projects that could be constructed, dreamt up if you will, and therefore the need for the money.
[00:09:44] Lowell Kalapa: And as a result I think, um, there tends to be probably a lot of duplication and unnecessary spending, unnecessary services, services that the people come to expect. Can you imagine when you think, okay, I'm paying all these high taxes, darn it, government should do everything for me from cradle to the grave.
[00:10:06] Lowell Kalapa: And I think the the best example is our school construction. And, the fact that I'm very gratified that suddenly people realize, hey, we cannot expect government to paint the schools, clean them up, repair the windows maybe or even to have private businesses donate their times as the phone company recently did in laying lines for our computer systems in our schools, that each of us have to contribute and we become a part of the system. But when we have all this money we just kind of expect government to provide all these services for us.
[00:10:35] Randall Roth: Jack, do you agree that government's been spending too much money trying to do too many things?
[00:10:43] Jack Suyderhoud: Well, some very visible examples, um, and they may not be large but I think they're instructive, is one for example is uh, traffic reports from Captain Irwin. I really don't understand why uh for example, um, the state has to provide those services, services when the private sector was providing them very adequately uh, before. Uh, to some extent uh, paralleling this, but uh probably a much uh greater cost uh is uh, after school daycare, which was being provided by the by the private sector. um, may may not be totally adequately, but was being provided by the private sector.
[00:11:23] Jack Suyderhoud: If we wanted to provide additional daycare services for certain people, we could have done done so through subsidies or vouchers instead of uh enacting an entire new state spending system, or excuse me, state program that uh requires support now to the uh, amount of, what is it, $8 million a year in terms of subsidies.
[00:11:45] Randall Roth: So you're thinking that uh this could be better done by the private sector. Is that the thinking?
[00:11:50] Jack Suyderhoud: Well, I absolutely I think it could be better done by the private sector, it would be cheaper if it were done by the private sector.
[00:11:56] Lowell Kalapa: I would say with a caveat. That is if government got out of the way, as it has put itself in the way over the last few years, they've created hurdles and barriers like you would not believe. Just in the area if we're talking about after school care, the the numerous, the multitude of regulations and hoops that you have to jump through in order to set yourself up as a childcare provider.
[00:12:19] Randall Roth: And that reminds me Low, earlier you were saying that that we're a tax hell in part because of over regulation. Can you give us another example or two of of over regulation that you think is burdensome?
[00:12:31] Lowell Kalapa: Well, in the childcare area, for example, I think, um, while I agree with the ratios as far as the age groups of children and preschool care, uh zero to four, um, there are all sorts of requirements with respect to building code, for example. Um, the fact that, uh, despite uh, the population moving in the direction of multi-story, multifamily dwellings, that is high rises because we're, you know, a land-short state as far as urban, uh, use, uh, childcare centers are still required to be on the ground floor period.
[00:13:06] Lowell Kalapa: Uh, so what does that say in the future? As we get more and more high rises and the convenience of having a childcare center, you may not always have the luxury of having a ground floor space available at reasonable costs to provide childcare and yet that's the only way you can open a childcare center.
[00:13:23] Randall Roth: I'm curious, do they have to have low flush toilets, too?
[00:13:26] Lowell Kalapa: No, they don't have to have low flush toilets, but they have to have toilets that are built to the size of the children, which makes sense. But it does raise the question of whether or not you need as many as they are requiring by rule and regulation.
[00:13:38] Randall Roth: Jack, do you think of over regulation as being a problem in Hawaii and is it somehow related to this tax hell question?
[00:13:45] Jack Suyderhoud: Well, I think it is a uh dimension. I, both tax hell and over regulation are dimensions of the what I consider to be an overly intrusive amount of government. I think that uh certainly in the area of, um, land use for example, um, there is over regulation to the point where it has contributed to the very much higher cost of land here, which is uh, has a pervasive impact on the cost of everything else.
[00:14:10] Randall Roth: And that's government policy?
[00:14:12] Jack Suyderhoud: Yeah, that's government policy.
[00:14:14] Lowell Kalapa: It's a very strong strangle hold over land use. The two, uh, I think biggest, largest, or most powerful bases of control is land use and taxation here in Hawaii. Uh, both of which tend to make the Price of Paradise very expensive. The cost of living of which we have learned, recently, ranges up to one third or to 40% more than you would find on the mainland.
[00:14:38] Randall Roth: You're listening to the Price of Paradise radio show. I'm Randy Roth, and my guest this week are Low Kalapa from the Tax Foundation of Hawaii and Jack Seiderhoud, a professor of Decision Sciences at the University of Hawaii. Low, the property tax, uh is it too low? Is it fair? Uh, what do you think of the property tax in Hawaii?
[00:14:58] Lowell Kalapa: Well, the property tax on a absolute dollar basis is relatively low by comparison to other states. But then we must remember that unlike other states, Hawaii is a very highly centralized form of government with the two most expensive programs located at state government level. And that is education, which is usually run by school districts on the mainland and local governments and health and welfare, uh, which is usually handled at the local level on the mainland. So we have a different type of system with less reliance on the property tax, um, to that extent, you know, when you compare absolute dollars to absolute dollars.
[00:15:37] Lowell Kalapa: However, the property taxes has tended not to produce enough money to run local government and that's mainly because local governments have to set tax rates each year. So the state government has benefited from the the high costs in Hawaii automatically, so they have had uh very little reason to increase tax rates and they can be very proud of that. And yet this largesse just keeps to grow each year because it's a percentage tax. The property tax is a set dollar amount per $1,000 of value and while the value goes up, the political hardship is that county leaders or county law makers have to set that rate each year.
[00:16:32] Lowell Kalapa: Given that the state burden is so onerous already, you got that general excise tax that Jack and I agree on that's pretty bad, personal income tax, and then the property tax, local law makers find it much harder to raise that tax, period.
[00:16:48] Randall Roth: Jack, [unintelligible — audio glitch] that the deal that the state can have tax increases year after year after year without voting on them, but the counties have to set that rate every year and that's why, or one reason why, property taxes are relatively low?
[00:17:01] Jack Suyderhoud: No, well I think [unintelligible — audio glitch] reason property taxes are relatively low is because county governments in this state do very little compared to local governments elsewhere. I think that the the other reason that they're they're low is that uh, indeed uh, county elected officials are sensitive to the rate. Um, if the property tax base expands due to increasing property values, they are under pressure from their constituents to lower the uh, the millage rate, what's equivalent to the millage rate. That is to say uh to lower the amount per $1,000 of assessed value that is taxed. Um, I think that annual pressure uh keeps property taxes rates low.
[00:17:46] Jack Suyderhoud: Um, if they just sat back and watched property values increase and did nothing with the property tax rate, they would probably be in better shape right now. But they haven't had that luxury.
[00:17:56] Randall Roth: What about the two tier rate structure that we have where people who own a residence are paying one rate and then the owners of hotels are paying another. Is that a good idea or a bad idea?
[00:18:08] Jack Suyderhoud: That's try, I I think it's political gimmickry. I I think the only way that you can justify um, having a having businesses pay more in property tax or higher property tax property tax rates, is if business property somehow uh benefits more from public services than uh does residential property. But I don't think that that's ever been the argument or the rationale for the differences in property taxes between residents and commercial property or hotel and apartment.
[00:18:38] Lowell Kalapa: Low, do you agree? Well, I the two tier rate is, well I wouldn't call it gimmickry as much as it being less than honest or less accountable because basically, you know, for a couple years there, and some people have always, they always disagree, but even a couple years there, people could say, wow, my tax bill, property tax bill actually went down.
[00:19:00] Jack Suyderhoud: this year because the county lowered the rate to an extent that was greater in the reduction than the increase in their individual property values. Um, so they they're led to believe, well, gee, these guys at City Hall must be pretty darn efficient, you know? They're they're providing me all these wonderful services for less money. And when in actuality, you're shifting the burden to those non-residential properties, commercial properties, and I, as a consumer then, going to any one of these stores or commercial properties and end up paying for it.
[00:19:31] Jack Suyderhoud: But I don't blame my county official, I blame the the grocery store, the clothing store, wherever I'm shopping, saying, my God, they're gouging me because they've raised prices since I was here last. Sounds like the classic definition of political gimmicky to me.
[00:19:48] Randall Roth: What about the hotel room tax? Uh is it too high, too low, uh structured properly, lol? Any thoughts on that one?
[00:19:54] Jack Suyderhoud: Well, I I think we may come from different points of view, Jack and I, that is, um on that. Uh, we would tend to believe that we already had a hotel room tax even before the 5% uh levy was imposed in 1986. Uh and that's because unlike on the mainland uh where the retail sales taxes aren't imposed on hotel rentals, the general excise tax at 4% was always there. Um, it is too high, I think from the standpoint that none of the current revenues are going toward the originally discussed purpose, that is the Convention Center, which hopefully will come to some sort of decision by this coming week.
[00:20:34] Jack Suyderhoud: Uh back in '86, the whole reason why the hotel industry after 30 years of opposition rolled over was that they needed money to build a Convention Center. And here it is some 8 years later and we have a 5% hotel room tax or transient accommodations tax, and no Convention Center.
[00:20:50] Randall Roth: Is that a bait and switch? Did they get fooled?
[00:20:53] Jack Suyderhoud: Uh, I think they didn't know the forest that they had entered, and it was quite dark when they came out, they realized they didn't have any clothes on.
[00:21:02] Randall Roth: I see. Jack, what about unemployment insurance? Is that a form of taxation? The amount the businesses have to pay for unemployment insurance?
[00:21:09] Jack Suyderhoud: Oh, absolutely. It's a it's a payroll tax that's uh determined in part by federal law and in part by Hawaii law. And uh it's a uh, it's very much a cost of doing business. It's an unavoidable cost of doing business, as long as you have employees and the payroll. Uh, under certain circumstances your tax rate is relatively low. That is to say if you, if you have a pretty good experience, you don't lay off many people. On the other hand, it can be uh quite substantial ranging up to about uh well depending on uh circumstances, about 6% of uh of payroll.
[00:21:42] Jack Suyderhoud: I think uh the unemployment insurance tax issue is one which frankly we haven't discussed very much, but I I've seen, for example, consistent uh subsidies from industries that keep paying into the system. Uh on average, uh and some industries that keep pulling out of the system on average, namely construction, for example, and agriculture. And they their workers are subsidized by workers in other industries.
[00:22:08] Randall Roth: How does that affect consumers?
[00:22:11] Jack Suyderhoud: Well, it uh it uh artificially uh reduces the prices of some things such as uh construction activities. On the other hand, it uh artificially increases prices on other things, uh areas such as services, wholesale and retail trade, and that sort of thing. It sort of works against what we would hope that we would have had here in Hawaii, that is to diversify our economic base. When you're constantly subsidizing traditional industries such as agriculture and construction, new industries which end up paying in and not taking out tend to see those costs as unbearable and and really can't survive.
[00:22:53] Jack Suyderhoud: And therefore, new industries that may want to take off here are obstructed by this type of system, not only unemployment comp, but workers' comp as well, uh temporary disability insurance, and even some who don't realize it, our medical insurance coverage, or prepaid health care.
[00:23:11] Randall Roth: What about smoke and mirrors? Lowell, you've written in volume 1 of the Price of Paradise and have a chapter in volume 2, which is a about to come out, on smoke and mirrors, different tricks that uh the state uses with respect to its level of spending.
[00:23:26] Jack Suyderhoud: Well, it's always my chuckle as I look back, because it truly uh the actions taken by recent legislatures to hide the money that was surplus money is because they were embarrassed that they had $700 million worth of surplus that they didn't spend.
[00:23:40] Lowell Kalapa: uh, created special funds. Uh they took monies that used to be on the table, it's called general funds, and they tuck stuck them in special funds so you can't see them.
[00:23:49] Jack Suyderhoud: And they spent them on such worthy projects as cash capital improvements for our school system. Uh, in a sense that muddied the accountability relationship between the money I pay as taxes and what I get out of the governmental system and public services, and that's the smoke and mirrors.
[00:24:05] Randall Roth: But if if it's being used for a good purpose, and I think most people support our public school system, what's wrong with that?
[00:24:12] Jack Suyderhoud: That's because you don't see the nearly $100 million that they took out each year for school construction. And so when you talk about the school budget, you only see what was on the table as far as general funds, and you never realize that they also had another 90 to $100 million sitting off in this thing called special funds because they never reported it.
[00:24:32] Randall Roth: Well, we've got just a few seconds left. Gentleman, how do we get out of tax hell? What what should we specifically change?
[00:24:41] Jack Suyderhoud: I'd like to see significant changes in the income tax. I'd like to see the top marginal rate brought down. I'd like to see the rate structure broadened. I'd like to see um the personal, excuse me, the standard deduction uh brought closer to the federal level.
[00:24:55] Randall Roth: Lowell, what's your answer?
[00:24:57] Jack Suyderhoud: I think the general excise tax is really where we look, although I would agree with Jack, and we have said from the outset since 1987, when we picked up the '86 federal act, rates were at much, much too high.
[00:25:10] Randall Roth: Thank you, Lowell Kalapa of the Tax Foundation of Hawaii, and Jack Cider Houten, professor of of Economics at the University of Hawaii. For information about future programs, send a self-addressed, stamped envelope to Hawaii Public Radio, 738 Kaheka Street, Honolulu, Hawaii 96814. Those comments should be sent to me in care of Hawaii Public Radio at that address. Again, it's 738 Kaheka Street, Honolulu, Hawaii 96814. Honolulu, Hawaii 96814. You've been listening to The Price of Paradise radio show. I'm Randy Roth. Aloha.
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