As Hawaiʻi’s lawmakers reopen the legislative session to tackle an estimated $1 billion gap in the state budget, it’s important for them to keep in mind that deep government spending cuts would have a devastating effect on our already injured economy, as well as hobble social services that are becoming more and more essential during this crisis. Instead, we should utilize the range of progressive options available to close the deficit without slashing critical government spending.

Spending is the fuel that keeps our economic engines running. As the private sector engine of our economy sputters, the government needs to throttle up its spending in order to keep the economy going. Past recessions have shown us that state spending cuts exacerbate the economic damage. At this crucial  time, cutting government spending would be akin to taking our foot off the pedal and letting the second engine of the economy sputter as well.

In fact, the International Monetary Fund has found that every dollar of reduced government spending results in as much as $1.50 in lost economic activity. That means that a $1 billion cut in public sector pay and social services spending could punch a $1.5 billion hole in our economy.

Look for Every Opportunity to Keep the Economy Running

One important way to keep the economy running is to keep government workers onboard at full salary. This ensures that they can keep paying for housing, food, transportation and other necessities. A big reduction in state worker pay would hurt not just the workers and their families but also local Hawai‘i businesses, inflicting more damage to the economy.

Another wise move would be for the government to direct money into the wallets of those who are struggling and who will immediately spend it on necessities. Doing so helps not only the recipients, but also Hawai‘i’s farmers, grocers, restaurants, retailers, property owners, and other local businesses.

Our leaders should also remember that social service cutbacks during the Great Recession continue to be felt and seen on our streets. Social service providers still haven’t been able to undo all the damage inflicted on nonprofits and the state’s mental health system by funding slashed a decade ago.

With interest rates at all-time lows and a huge new Federal Reserve lending facility opened for the states, the best course for Hawai‘i would be for the state to borrow money and find progressive revenue sources, rather than cut spending.

Multiple progressive, recession-appropriate revenue options exist, capable of bringing in nearly $3 billion into state coffers. Good public policy can help us minimize damaging spending cuts as well as keep the economy afloat now and ready for a better future.

Tap the Federal Reserve Municipal Liquidity Facility

The state constitution authorizes general fund expenditures in excess of revenues “when the governor publicly declares the public health, safety or welfare is threatened,” and may issue bonds “to meet emergencies caused by disaster or act of God.” This provision exists for precisely the kind of emergency we’re currently facing, and the state should make use of it.

In fact, borrowing money may be the best option for the state right now. Through its new Municipal Liquidity Facility, the Federal Reserve is offering loans to states to help manage cash flow stresses caused by the coronavirus pandemic. The maximum loan amount is 20 percent of general fund revenue, or about $2.13 billion for Hawai‘i.

Hawai‘i would be able to borrow at the lowest possible interest rates, since the state announced last December that it had achieved its best credit rating ever. This opportunity is available through December 30, 2020, and the loans must mature 36 months or sooner from the date of issuance.

Capture the Top One Percent’s Income Tax Break

Hawai‘i’s top one percent earn more than $557,600 per year, with an average income of about $1.3 million. The federal Tax Cuts and Jobs Act is giving each of them an average federal income tax break of $35,460 in 2020. This would be a good time for them to share those federal tax savings—estimated to total $253 million—with the state.

If Hawai‘i’s top one percent were to pay 10 percent more in personal income taxes than what they currently pay, each would owe an average of $8,200 more, yielding a total about $43 million in revenue for the state.

Capture the Corporate Profits Tax Break

The federal Tax Cuts and Jobs Act cut the federal corporate income tax rate by 14 percentage points, from 35 percent to 21 percent, so companies are getting a large tax break at the federal level.

Hawai‘i’s current top corporate tax rate of 6.4 percent is below the median of the states. We are ranked 34th among states in per capita corporate tax collections, at $103 per person, while the 1st state, New Hampshire, collects $582 per person.

Corporate taxes differ from individual income taxes in important ways. First, the corporate tax is applied only to profits, so companies facing losses do not pay corporate income tax.

Second, having different income tax brackets makes sense for individual income taxes because those with lower incomes are less able to afford a high tax bill. However, there is no similar “ability to pay” concept for corporations. Hawai‘i has three corporate tax brackets, while more than 30 other states have a single corporate tax rate.

If Hawai‘i were to have a single tax rate on corporate profits of 9 percent, the state would raise an additional $103 million in revenue.

Close the Capital Gains Tax Loophole

Hawai‘i is one of only nine states that allows capital gains—profits from the sale of stocks, bonds, investment real estate, art,  and antiques—to be taxed at a lower rate than ordinary income. That’s a tax break that goes almost entirely to high-income taxpayers, including non-residents who profit from investing in real estate in Hawai‘i.

Long-term capital gains constitute 10 percent of total taxable income in the state, or nearly $3.5 billion in 2017. If those capital gains were taxed at regular individual income tax rates, the state would bring in about $100 million in new revenue.

Tax Real Estate Investment Trusts

Real Estate Investment Trusts (REITs) own approximately $17 billion worth of Hawai‘i real estate and earn about $1 billion in profits every year. Hawai‘i REITs should be taxed, as is every other individual and corporation doing business in Hawai‘i. If REITs paid regular corporate taxes on their profits, that would mean $60 million in potential tax revenue every year.

While Hawai‘i has more land value tied up in REITs than any other state in the nation, relatively few Hawai‘i residents own shares in REITs (we rank 40th in the nation for the number of REIT shareholders as a percentage of the population). As a result, not only is income produced from Hawai‘i property leaving the state, but the income that is funneled out of the state is not getting taxed here either.

Even if REITs were able to find a way to avoid half of the corporate taxes that could be assessed, removing the REITs tax loophole would still yield about $30 million in new revenue.

Have Wealthy Pensioners Pay Their Fair Share

Hawai‘i is one of only 10 states that provides a full exemption of public pension income from taxation. The majority of states cap the amount of pension income that is exempt from taxes or limit the exemption to taxpayers below a specific income level.

Providing a reasonable exemption would protect low-income retirees while also ensuring that those fortunate enough to enjoy comfortable retirements pay their fair share. Capping the pension exemption at $25,000 per year—in other words, taxing pension income only above that level—would generate about $53 million.

End Offshore Tax Haven Abuse

Corporations use complicated schemes to shift earnings to subsidiaries in offshore tax havens—countries with minimal or no taxes—in order to reduce their tax liability by billions of dollars. The result is that large multinationals have an unfair advantage, avoiding taxes that small local competitors must pay.

Worldwide combined reporting requires a corporation to report their total global profits and the portion of their overall business activity in a given jurisdiction. So if a state makes up 2 percent of a company’s global business, then 2 percent of their taxable profit would be subject to state tax.

If Hawai‘i adopted worldwide combined reporting, it would collect an additional $38 million from large multinational corporations.

Eliminate the Property Tax Deduction

Hawai‘i has the lowest residential property tax rate in the nation, or nine times lower than the rate of the highest state. Even with our high home values, we are 49th in the nation in the portion of state and local revenues collected via property taxes.

Because Hawai‘i is the only state that funds its public schools entirely from the state general fund, in essence all state taxpayers are subsidizing property owners by providing funding for education that would normally be collected in property taxes.

The federal government allows a deduction for property taxes paid because property taxes are the primary source of funding for public schools in the other states. As a result, Hawai‘i’s residential property owners receive tax deductions at both the federal and state levels to account for funding that they are not providing to education.

Elimination of the property tax deduction would generate about $34 million in additional revenue.

Adding it All Up

The progressive revenue estimates described above and summarized in the table below were drawn from a variety of sources and calculations were based on a normally-functioning economy. With Hawai‘i currently facing an unprecedented economic downturn, the actual revenues that such options would generate are likely to differ from these estimates. However, they still serve as a guide to where progressive and potentially significant revenues can be found.

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