REPORT TITLE:
Taxation; Study


DESCRIPTION:
Requires the department of business, economic development, and
tourism to compare and contrast three alternative tax proposals.
Appropriates funds for study.  

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        
HOUSE OF REPRESENTATIVES                H.B. NO.466        
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO A STUDY OF THREE TAX PROPOSALS.



BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  Hawaii is at a historic turning point in its
 
 2 economic development brought on by the disappearance of the
 
 3 pineapple and sugar industries, the ongoing local contraction of
 
 4 defense spending, and the emergence of a fiercely competitive
 
 5 world marketplace of products and services.  At this critical
 
 6 juncture, we can continue doing business as usual, and watch our
 
 7 job market slowly deteriorate while realistic hopes for
 
 8 prosperity wither away; or we can face up to the reality of our
 
 9 situation and find the courage to act wisely and decisively.
 
10      Although economic prosperity grows out of a complex web of
 
11 interacting social, political, and economic factors (rather than
 
12 just one controlling circumstance), one has to start somewhere.
 
13 Hawaii's tax code has special potential as an instrument for
 
14 revitalizing our business environment.  Although it profoundly
 
15 impacts the whole of society, especially our fiscal and
 
16 investment climate, it can be altered with relative independence.
 
17 Moreover, our existing state tax code is one of the most powerful
 
18 factors contributing to an unhealthy business climate in Hawaii.
 
19 Among the drawbacks (too numerous to list) to our existing state
 
20 tax code are:
 

 
Page 2                                                     
                                     H.B. NO.466        
                                                        
                                                        

 
 1      (1)  It unfairly distributes the tax burden between the
 
 2           lower, middle, and upper income brackets;
 
 3      (2)  It is outrageously complex, confusing, and deceptive;
 
 4      (3)  It drains off an incredible amount of human and
 
 5           financial resources into the unproductive activities of
 
 6           taxpayer compliance and government administration;
 
 7      (4)  Its maze of incentives and disincentives generates
 
 8           business and consumer decisions which in turn create
 
 9           market distortions; and
 
10      (5)  Because it is inflationary, it puts Hawaii's products
 
11           and services at a competitive cost disadvantage
 
12           relative to other states.
 
13 Various interest groups may differ about whether the amount of
 
14 the tax burden on the people of Hawaii is too high, too low, or
 
15 just right; but there is little room to deny that our system of
 
16 state taxation hinders job creation by discouraging people from
 
17 starting or relocating a business in Hawaii.
 
18      Out of these concerns emerges the ambitious approach in this
 
19 Act, referred to as the "Yoshinaga Proposal For Comprehensive
 
20 State Tax Reform" encompassing a dramatic overhaul of Hawaii's
 
21 state tax code wherein all but three of Hawaii's eighteen
 
22 separate state taxes (those imposed on alcohol, tobacco and
 
23 cigarettes, and fuel) are repealed in favor of one simple and
 

 
Page 3                                                     
                                     H.B. NO.466        
                                                        
                                                        

 
 1 broadly based, single-rate income tax.  With one compelling
 
 2 exception, all deductions, adjustments, exemptions, and credits
 
 3 are completely eliminated: that one exception being a deduction
 
 4 for the cost of a business purchase of products and services from
 
 5 another Hawaii business entity also subject to this tax.  As a
 
 6 result, this proposed tax confers no special preferences on any
 
 7 particular kind of income or business.  No type of income,
 
 8 whether it be wages or investment, no recipient of income,
 
 9 whether it be an individual, a corporation, or any other type of
 
10 business either escapes taxation or is granted a special tax
 
11 break.  All income, from all sources, and to all recipients is
 
12 taxed at the same rate.  This proposal is truly conceived in the
 
13 virtue of simplicity and all of the benefits it creates.  Gone
 
14 are the mysterious, dangerous, and burdensome complications
 
15 usually associated with calculating and reporting tax liability.
 
16 Gone are the incentives to make business decisions (that would
 
17 otherwise be unreasonable) merely because of tax considerations.
 
18 Gone are the incentives to contrive an increase in operating
 
19 expenses to reduce artificially one's taxable profit when the
 
20 rational objective should be to reduce unnecessary expenses and
 
21 thereby increase efficiency.  Gone are the de facto tax subsidies
 
22 for any and all kinds of operating inefficiency.  Although
 
23 adopting this proposal for comprehensive tax reform requires a
 

 
Page 4                                                     
                                     H.B. NO.466        
                                                        
                                                        

 
 1 complete reconceptualization of Hawaii's tax structure and tax
 
 2 environment, the significant benefits inherent in this proposal
 
 3 accrue to an extraordinarily wide range of interests encompassing
 
 4 those of taxpayers, job seekers, and job-creating entrepreneurs.
 
 5      At the same time, two more modest tax proposals have been
 
 6 suggested in the final report of the 1996 tax review commission.
 
 7 One recommends considering the replacement of Hawaii's existing
 
 8 general excise tax with a straightforward retail sales tax.  The
 
 9 other recommends considering the replacement of Hawaii's existing
 
10 general excise tax with some kind of value added tax.  No draft
 
11 legislation has been suggested by the tax review commission for
 
12 its own two recommended proposals.  In contrast, the "Yoshinaga
 
13 Proposal For Comprehensive State Tax Reform" has been drafted as
 
14 House Bill No. 2077 (1997).  Responsible consideration or
 
15 enactment of any substantive tax reform, be it dramatic and
 
16 comprehensive or more modest and narrowly defined, requires
 
17 detailed exploration of the consequences for tax revenue and
 
18 public expenditures.  The purpose of this Act is to conduct that
 
19 detailed exploration of these three methods.
 
20      SECTION 2.  The department of business, economic
 
21 development, and tourism shall conduct a two-part, in-depth study
 
22 of the three proposals described in section 1.  In the first part
 
23 of the study, the department shall use, as starting point for the
 

 
Page 5                                                     
                                     H.B. NO.466        
                                                        
                                                        

 
 1 study, H.B. No. 2077 (1997) for the single-rate/single-tax
 
 2 proposal; the form of a sales tax from another state as it would
 
 3 apply if enacted in Hawaii in lieu of a general excise tax, and
 
 4 the form of a value-added tax as it would apply in Hawaii if
 
 5 enacted in lieu of a general excise tax.  The study shall
 
 6 evaluate each proposal in terms of:
 
 7      (1)  Its consequences for Hawaii's economy and business
 
 8           environment;
 
 9      (2)  The technical and policy problems likely to be
 
10           encountered in implementing the proposal, and means by
 
11           which those problems can be minimized; and
 
12      (3)  A determination of the specific percentage rate of tax
 
13           required, and the modification, if any, that must be
 
14           made in order for the proposal to be revenue neutral,
 
15           that is, to raise no more nor less revenue than would
 
16           be raised by the tax or taxes being replaced in the
 
17           proposal.
 
18      Part two of this study is intended to provide detailed
 
19 background information crucial to evaluating the results of the
 
20 comparative analysis specified in part one.  Part two shall,
 
21 therefore, survey at least one hundred American corporations
 
22 having the largest gross revenues to ascertain their dominant
 
23 considerations precluding Hawaii as a viable base of operations
 

 
Page 6                                                     
                                     H.B. NO.466        
                                                        
                                                        

 
 1 or location for corporate headquarters.  The point of this survey
 
 2 is to confront the way corporate America already perceives
 
 3 Hawaii's business environment to determine whether any recurring
 
 4 elements of that perception provide guidance in assessing
 
 5 proposed changes to our existing state tax code.
 
 6      The department of business, economic development, and
 
 7 tourism may contract out all or part of the research and analysis
 
 8 of this study to complete the study in a timely manner.  The
 
 9 department of taxation shall provide any data or assistance
 
10 required by the department of business, economic development, and
 
11 tourism.  The department of business, economic development, and
 
12 tourism shall report its findings and recommendations to the
 
13 legislature no later than twenty days before the convening of the
 
14 regular session of 2000.
 
15      SECTION 3.  There is appropriated out of the general
 
16 revenues of the State of Hawaii the sum of $           or so much
 
17 thereof as may be necessary for fiscal year 1999-2000 for the
 
18 purposes of this Act.
 
19      The sum appropriated shall be expended by the department of
 
20 business, economic development, and tourism for the purposes of
 
21 this Act.
 
22      SECTION 4.  This Act shall take effect on July 1, 1999.
 
23 
 
24                           INTRODUCED BY:  _______________________