LOS ANGELES—Hawaii legislators almost universally panned a report from the state’s Tax Review Commission that recommended tax increases and emphasized that the state could not solve its financial woes by cuts to government services alone.
But Kalbert Young, the state’s budget and finance director, said legislators will have to contemplate tax increases during the next biennium to deal with unfunded pension liabilities.
The commission, which meets every four to five years, is tasked with recommending changes to the tax structure designed to make the state more fiscally robust.
Lawmakers from both sides of the aisle criticized the report as one that recommended ideas that have already been introduced and defeated by the legislature over the years.
Rep. Gene Ward, the lone Republican in the Hawaii House of Representatives, said the $100,000 spent by the commission on the report produced by Philadelphia-based PFM Group was a waste of money.
“For that kind of money, they could have come up with something new,” Ward said.
Ward said the state should focus on growing the economy, and therefore the tax base, not raising taxes. He also was disappointed that the report did not study the impact tax credits implemented to encourage growth in the high tech and solar industries have had on those industries.
House of Representatives speaker Calvin Say and finance chair Marcus Oshiro jointly issued a statement signed by 29 other legislators that criticized the recommendations intended to generate net general revenues of $481 million in 2014 and possibly annually thereafter.
The legislators opposed the increase of the general excise tax rate by 0.5 percent, the imposition of the income tax on pension income, the increase of the corporate income tax rate, and the elimination of income tax deduction for real property taxes paid.
“PFM has not analyzed the impact of its recommendations on the Hawaii economy,” according to House legislators. “PFM also has not analyzed who will actually bear the burden of the tax increases, whether residents, business or tourists.”
The state experienced a 14.9% increase in general fund revenues in fiscal 2010-11 and has the opportunity to generate sufficient annual ending balances into the near future without any tax increases – which makes public acceptance of a $481 million tax increase unlikely, legislators said.
The consultants, however, were trying to come up with a combined approach to deal with the state’s unfunded pension liabilities, according to the report.
Currently, Hawaii has a total pension liability of $21 billion, of which 60 percent or $9 billion are unfunded, Young said. The state’s OPEB, Other Post-Employment Benefits, liability is $16 billion, of which $14 billion is unfunded, he said.
Hawaii clearly has to do something, because maintaining the status quo is not sustainable said Young, who expects legislators will adopt some mix of what the commission recommended when the legislature convenes next year to draft it’s next two-year budget.
Legislators largely chose to make cuts rather than increasing taxes during the recession, Young said, but many government agencies are hoping that their programs will be restored to pre-recession levels. State employees, who not only have not had a raise since 2009, but took a 4% pay cut, will be asking for salaries to be restored – and every state employee contract comes up for renegotiation this year, he said.
“Hawaii needs to get more proactive about unfunded liability and refunding of OPEB, dealing with federal mandates, and maintaining the level of service delivery the public expects,” he said. “We are in a situation where if we make the wrong choices for the near term expenses will exceed us and that means doing something on the revenue side as well.”
Hawaii Tax Foundation president Lowell Kalapa agreed that the legislature needs to craft a plan to deal with the state’s unfunded liabilities.
Cuts should be made to the newer state agencies that, he says, raided pension funds during the late 1980s and 1990s when the market soared. But he also said pension and retiree health care need to be “reined in.”
