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Home My WebLink AboutCOM 0612.000 1996-1998 1 err or M~ l c~.. w~ JOHN RAY - - \~W~; Hilo Phone: (808) %1265 Councilman ? • i_. - Fax: (608)%94291 ' ~ Waimea Phone: (808) 885-5875 uf~TP ov~M~'` - Fax: (808) 885-7184 COUNTY COUNCIL County of Hawaii ~ Hawaii County Building C~i~ 25 Aupuni Street Hilo, Hawaii 96720 December 2, 1997 MEMO TO: All Councilmembers FROM: John Ray, Chair Committee on Human Services and Economic Development RE: December 2, 1997 Meeting to Discuss the Recommendations of the Governor's Economic Revitalization Task Force Please find attached materials to facilitate our discussion of the Governor's Economic Revitalization Task Force, The first item in the packet is an outline of the recommendations. I am sure most of you have received the majority of these materials previously, but I have included the Tax Foundation's comments, as well as the Republican's comments. I've provided these additional materials in order to take a broad view of the subject and stimulate discussion. Thank you for your consideration of this matter. RAY/kle 6 ~z >A?. x.. S7A ~Arosenfed Ff SED~- DEC 2 1997 Hawaii Economic Revitalization Task Force October 22, 1997 I. Hawaii is facing a serious economic challenge A. "Downturn" is reaching into a seventh year, stretching any conceivable definition of a cyclical downturn B. Measures in economic terms 1. Jobs are down, real income is flat, and wages and salaries are declining 2. Business failures are increasing 3. Tax base is Flat C. Also, real measures in "people terms" 1. Reduced ability to fund social and charitable needs 2. Declining ability to provide for needs of citizenry including key infrastructure 3. Opportunities for our children are constrained II. Issues are structural in nature and need to be addressed at that level A. Globalization from technology and communications 1. Economy is no longer insular 2. Forces us to be internationally competitive; the alternative is "slow death" 3. Future actions must focus on cost of business, living and government. B. Mandates change in our approaches and structures 1. Change is difficult and will be painful; alternative is much less attractive 2. Requires us to put aside historical group differences and understand that, given our size and position, we must all work together I C. Against this backdrop, Governor. President and Speaker appointed a task force 1. Twenty-six members, drawing from across the community 2 Objective: recommend small number of major initiatives to improve our economy both near and longer term III. Major issues or objectives identified to stimulate economy, improve performance and competitiveness A. Reduce cost of living and doing business in Hawaii B. Improve the regulatory climate and efficiency of government C. Strengthen the marketing and promotion of our key industry, tourism D. Make structural changes to improve our school system Given the importance of the military presence in Hawaii, the continued support of the military and our national defense is an important element in strengthening our economy. IV. Major structural initiatives A. Strengthen the competitive position of our tourism industry 1. Provide increased funding for tourism promotion at the $60m (1997 dollars) level and restructure the accountability for these funds a) Dedicate a fixed proportion of Transient Accommodations Tax (TAT) revenue i) Raise TAT rate from 6 percent to 7 percent of hotel rentals ii) Dedicate 3 percentage points of the 7 percent TAT for tourism marketing iii) Broaden the TAT base to include timeshare condominiums b) Establish an executive board to oversee tourism marketing i) 7 to 11 private and public sector members ii) Geographic representation to include Neighbor Islands iii) No more than 10% of budget used for administration c) Executive Board assumes responsibility and is accountable for the expenditures, contracting out and measurement of fund's impact All tourism marketing activities will fall under purview of the board ii) Non-research tourism functions in DBEDT would be transferred to the new board iii) Research functions will be the responsibility of DBEDT iv) Board will be responsible for annual report on objectives and performance to Governor/Legislature 2. Improve visitor infrastructure and activities a) Waikiki represents 70% of our largest industry. It is the heart of this industry and has unfortunately, lost its strong competitive position due in large part to a lack of investment in infrastructure and attractions. To insure that Waikiki remains competitive with other destinations, a joint State/City analysis group should be appointed by the Governor and Mayor to address the revitalization of Waikiki. This group would consider: i) Relationship of Waikiki to adjacent areas of Kakaako to Diamond Head ii) Infrastructure to support improvement of competitive position iii) Commitment to major Ala Wai improvement project iv) Plans for private investment and actions needed to encourage investment in the near term Specifically, the issue of State/County responsibility for this crucial state asset must be addressed b) Establish a 10-year goal of securing a major league sports franchise The effort would be speafieaded by a new privately-funded 501(c)(3) corporation. This organization would draw heavily from the community. The attainment of this goal (and even the pursuit) is important to our position in the Pacific and to our economy. It would also serve as an important rallying point for our community. B. Make structural improvements in the regulatory process in Hawaii 1. Require that all permits, approvals and licenses have a maximum timeframe for review and approval 3 J a) For all licenses, permits and approvals, the issuing agency or department (either State or County) must establish a timeframe b) The license, permit or approval must be granted or denied within that timeframe (no extensions permitted); otherwise approval is automatically granted c) Administrative appeal process with specific time limits would be available at relevant level (e.g., Governor at State and Mayors at County) Process provides certainty in the time to gain necessary approvals, permits and licenses. Disclosure also provides measures and standards to both public sector managers and private sector users. 2. Eliminate the State Land Use Commission and transfer certain responsibilities to other State units a) BLNR responsible for conservation district boundaries b) All other reclassifications and parcel-specific reviews will become the responsibility of the Counties c) Development standards regarding State-specific interests (e.g., educational issues, State highway, etc.) on non-conservation lands will be established by the State; Single State agency/department (TBD) will be responsible for matching standards against project plan and providing sign-off, rather than approving or permitting A major issue raised by businesses inside and outside the State is the lengthy and indeterminate time required for regulatory approval§ and the duplicative nature of approval processes. These two actions will not only make substantive changes in the process, but also send a strong, proactive signal of the State's intent to improve the overall regulatory climate. A strong desire was expressed to encourage all agencies and departments- State or County-to adopt one-stop permitting processes and permitting by general rule. The Task Force concurs and will encourage the expansion of this effort (e.g., used successfully by Dept. of Health, etc.) at al! levels of government. 3. Prohibit worker's compensation claims related to stress from appropriate disciplinary actions (the Mitchell decision) 4 C. Position the University of Hawaii as the preeminent institution in the world in key areas to help drive the local economy 1. Restructure the University of Hawaii into aquasi-public corporation with independent accountability; State support to be determined by the Legislature and Executive Branch a) This will provide additional autonomy to the University to set priorities, own and manage lands, funds and resources, including legal counsel, and encourage a stronger entrepreneurial approach b) In return, the University will be better able to develop'~,vorld-class" standing in key areas and increase the proportion of private funding 2. Establish an advisory Board of Visitors comprising distinguished individuals from around the world a} Expand the horizon of the University and ability to both relate and market to the Asia-Pacific region b) Help position the University as a major institution in the Pacific 3. UH will explore actions up to, and including, the acquisition of the East-West Center and position it as the preeminent Asia-Pacific institution in the world and a cornerstone of UH's reputation in this broad arena a) This would be a major asset for the UH and afford not only survival, but real success for the Center in the face of ever-declining federal funding b) UH would acquire necessary physical facilities O. Resolve Hawaiian claims and self-determination issues Resolution is vital and requires that native Hawaiians and representatives from labor, business, government and the community come together in discussions of this issue for the betterment of the entire community. E. Strengthen the efficient delivery of governmental services 1. Create a GAAP-based (Generally Accepted Accounting Principles) government accounting and budgeting system 5 a) Provide a clear view of the actual costs of providing government services by converting the State's accounting system from a cash to an accrual accounting system including capital charges for fixed assets to promote efficient use of those assets b) Change the budget system from an input-based system to an output- based system with tightly specified outputs to be purchased and outcomes Sought c) Improve the overall efficiency of the public sector by providing additional opportunities and flexibility in the delivery of services 2. Reduce duplication of government functions A major obstacle to an effective and cost-efficient delivery system of government services is the duplication between the State and Counties. It is essential that duplication be eliminated in areas such as: a) Highway and road maintenance b) Parks c) Health & ambulance services d) Human services e) Housing f) Civil Defense It is the clear recommendation of this group that significant strides be made in this area. Parity among counties should be an important objective. To achieve this, a group of State, County, and private sector representatives should analyze this issue, determine areas and methods to consolidate, and gain agreement on implementation plans. 3. Support cost-efficient govemment services through managed public-private competition a) Improve the overall efficiency of the public sector by providing additional opportunities and flexibility in the delivery of services h b) Enable State and county governments to implement public-private competition for government services through a managed process that determines whether a particular service can be provided more efficiently, effectively and economically by a public agency or a private enterprise. c) The managed process shall consider all relevant costs d) Establish protections for affected State and county employees, and ensure that civil service laws and merit principles are not violated 4. Revise the State procurement code to provide greater flexibility, while maintaining accountability F. Make structural changes to better empower individual schools to meet their particular community, students, and faculty 1. Adopt County-based school boards jointly appointed by the Governor with appropriate confirmation a) Funding would remain at the State level b) Four County school boards with 7 members c) A statewide superintendent appointed and reviewed by the Governor . would continue. This superintendent would appoint each county superintendent with concurrence from the County school boards d) Basic academic standards and guidelines would be set at the State level, but how to best achieve those standards, given the various needs of the local communities, will be determined at the county level 2. Empower individual schools through the strong use of school-based budgeting through a decentralized community-based focus of the county boards, with particular consideration for schools with special needs. Multiple goals of increased accountability and decentralization are achieved in this proposal. 3. Establish two major strategic priorities for the County Boards and individual schools: a) Instill aworld-class focus on the Pacific Rim into the curriculum of all schools Establish goal of second language competency for all high school graduates by the year 2004 ii) Utilize non-certified instructors in foreign language for this purpose b) Create aworld-class technology infrastructure and education focus in all schools i) Establish computer literacy for all 8`" grade students by 2000 ii) To fund program, private sector commits to S10 million to provide computer/network technology in schools throughout the State 4. Within existing labor-management relationship, restructure principal/vice principal framework in two areas: a) Revise compensation program to provide pay relating to identified performance measures b) Provide significant flexibility in assignment of principals to match school needs with individual skills All groups agreed to work towards riiis in arenas of management, collective bargaining, legislation, etc. 5. Focus school boards, school management, faculty, parents and community on two fundamental issues in public schools a) Create "low tolerance' approach to discipline in public schools b) Establish programs to encourage (strongly) parental participation in day- to-day education The focus needs to be reflected in (1) legislation to provide support to faculty and management in discipline in schools and (2) pen'ormance measures at the school level, (3) incentive compensation. 6. Continue the Hawaii School-to-Work Opportunities program after federal funding ends in 1999 through private sector funding. The School-to-Work program represents a structural change to the present school organization and concentrates on preparing students for careers. The interaction between all levels of schooling and with the private sector has greatly improved the applicability of schools to the workplace. As part of the publiGprivate sector partnership the school system would encourage participation in the program and the private sector would provide funding. 3 G. Restructure the tax system, achieving significant reductions 1. Major shift to provide benefts to our citizens and attract new investment a) Top marginal income tax rate reduced: i) Initially from 10% to 7% ii) After three years, further reduced to 6% iii) All other rates reduced proportionately (see attached table) b) Provide nonrefundable tax credit for those with low modified adjusted gross income below $20,000 Income tax burden will be reduced by 40 percent or $400 million after three years. c) Reduce pyramiding of the GET (taxes on taxes) which is a major issue with smaller businesses (a tax saving of $158 million annually). d) Corporate income tax and franchise tax rates cut in half (saving $40 million). Corporate income tax rates drops from a top rate of 6.4% to 3.2% (to lowest top marginal rate among states with a corporate income tax) e) GET is raised from 4% to 5.35% f) Exempt exported services from GET to place exported services on the same basis as exported goods g) Impose GET on imported services to place it on the same basis as imported goods 2. Near-term stimulus of $100 million tax decrease, reaching $200 million in three years, while preserving core of essential and important governmental programs and services The impact is a greatly reduced tax burden on Hawaii by reducing tax rates and shifting burden to outside the state AND a much enhanced ability to attract new investment which is essential to growing real income or creating opportunities today or tomorrow. 9 ~CO`G~l(C RECO~'Ek`' TASK FORCE October 2:, 1997 "Adapting to a Changed World": A Bold Plan to Revitalize Hawaii's Economy Today, we are faced with a serious economic challenge. Hawaii has ranked at the bottom in economic performance over the last few years. Investment has come to a halt and bankruptcies are rising. We have actually lost jobs in four of the last five years, Hearty 20,000 jobs. Income is stagnant. And real wages and salaries are declining. This recession is now moving through its sixth year, stretching any conceivable definition of a cyclical downturn. And, we are perceived as a poor place to do business. We see this in real examples all around us. A local firm closes their manufacturing facility. One of our largest local homebuilders has shifted all new investment to the Mainland. And even homegrown businesses are looking outside of Hawaii as a means to remain competitive. And this comes at a time when the nation and even world are making some of the strongest economic strides in history. Nationwide, the number of jobs increased by 10% and real personal income grew 12%. And measurement of the changes in our economy is not only in economic terms. There are just as real costs in social terms. Can_we. through our P~^~nmy ciToonn those in our_cnmmunity in need? Can we ensure the resources to provide a safe and clean environment? Can we provide opportunities for our children to be able to stay here in Hawaii? In the end, our successes or failures will determine the opportunities for our people, our ability to fund social and charitable causes, the strength of our tax base to maintain needed infrastructure and serve individual needs, and the potential for our children to secure at least a reasonable standard of living here in Hawaii. These are people issues -not business issues. The issues we face are structural in nature and they need to be addressed at that level. In the past, Hawaii, due to geography, could be viewed and addressed as e ECOYONIC RECOVERY T.~SK FORCE October 199' an insular economy with the policy focus could and was largely on an internal view of economic issues and consequences. We also enjoyed an incredible period of economic growth. Today, however, we face the consequences of structural changes in the world. Technology and communications and the resulting global economy have changed the way we need to operate in this environment. Global competition, open markets and the information age force us to be globally competitive. The situation we find ourselves in Hawaii is directly due to these structural changes taking place in the world. Our ability to accept, cope and capitalize on the changes is our success and survival. What is clear is that the "rules of the game" have changed and the cost of not ' adapting is high. Truly we are at a crossroads. We can embrace the changes taking place around us, be competitive in a global economy and provide real opportunities for our people today and our children tomorrow or we can place much at risk. To be successful under these "new rules," we must put aside historical differences. Nobody wrote these new rules and the "problem" is not government, business or labor. Rather, we all need to work together as a team, focusing our energies and attention externally to compete against other areas of the world. In response to these challenges, the Governor, President of the Senate and Speaker of the House appointed a Task Force to recommend major initiatives to improve the State's economy both near and longer term. The Task Force was made up_of2Z-members from across the~tate and representing a variety of ~rtte es. The foruswas-on'fiotd, fundamental and-strategic actions. The process began with a series of working groups. These working groups comprised over 150 residents of our State drawn broadly from all sectors, especially small business. In over thirty public meetings, they drew on individual experiences and perspectives, resources from across the world and over B00 comments, research and suggestions and ideas from the public identified. The Working Groups placed over 50 options before the Task Force. This document identifies the program to revitalize Hawaii's economy developed by the Task Force. It was the strong belief of the Task Force that Hawaii's problems are structural or fundamental and, as a result, the Task Force focused on fundamental changes to our economy. 0 F,C'O~'O>IIC RECO~'ERt' TASK FORCE Octobcr 1907 As such, this document: 1. Identifies the Vision Statement developed by the Task Force 2 Reviews the major issues which must be addressed to revitalize the economy and ensure longer term competitiveness 3 Determines the major structural initiatives to achieve the objectives of a revitalized, globally competitive economy Each topic is discussed in turn. Vision Statement The issues before the Task Force went far beyond a narrow definition of economic issues. Indeed, the issues focused specifically on the vision the members for Hawaii today and tomorrow. In response, they adopted a statement which describes an energized Hawaii preserving and protecting important social, cultural and environmental qualities. The statement adopted is: A Hawaii for our people today and our children tomorrow marked by a vibrant, diversified, globally competitive economy that is supported by a well educated and skilled workforce. This economy will provide trie foundation for a society with a - meaningful quality of life, respect for our cultures and environment and equal opportunities (or all our people. Major Issues to Revitalize~heFconomy To achieve strong economic performance consistent with this vision, four issues need to be considered: 1. Reduce the cost of living and doing business in Hawaii. To maintain our base, afford our citizens the opportunity to attain a reasonable standard of living and encourage investment (for jobs and income), it is essential the costs of living and doing business in Hawaii be addressed. This focuses largely on taxation and its role to stimulate the economy short term and attract new investment in the future. 2. Improve the regulatory climate and efficiency of government. Hawaii is perceived as a poor place to do business. Our processes tend to be lengthy and cumbersome. i 0 ECO`O~IIC RECOVERY TAS(i FORCE Octobcr 22. 199 In a world where speed and reaction time are crucial, we are uncompetitive in providing approvals, permits and licenses to individuals. Businesses cannot accept undetermined or lengthy timeframes reaching into years when their product life cycles are measured in months. To attract opportunities for our people which also benefit our tax base and ability to fund our community, we need to recognize those new standards. 3. Strengthen the marketing and promotion of our key industry, tourism. Tourism is our largest industry and one where we have a demonstrative competitive advantage. To generate jobs and revitalize our economy, this industry must play an important role. 4. Make structural changes to improve our educational system. Economics are based on swell-educated and trained workforce. If we are to compete globally, our educational institutions must produce graduates capable of competing globally and provide a base for economic viability. The program that follows is bold and historic. It will not only improve our economy today, but just as important, ensure we will be competitive in the years ahead. This program involves major changes -the circumstances dictate no less. It is a total package with interrelated components. It will kick start our economy and ensure we compete -successfully - on a global basis. a ' F.CO.~~O~tIC RECOVERY TASf: FORCE October 2:, 1997 TOURISM INDUSTRY COMPETITIVENESS The tourism industry represents approximately one quarter of Hawaii's economy. It is our largest industry and provides one third of all jobs in the State. While the tourism has been growing dramatically around the world, Hawaii's growth has plateaued. Rival destinations such as Guam, Mexico and Australia have become major competitors for our potential visitors. In order to compete effectively, Hawaii must have a more aggressive marketing campaign in order to maintain its position in the world market. To do this, the public and the private sectors need to build a partnership to increase funding for tourism marketing. The Task Force recommends that money for tourism marketing should come from a dedicated source. The Task Force proposes that a dedicated funding source be established to create a tourism marketing fund of approximately sixty million dollars. The source of the funds would be three percentage points of an overall 7% Transient Accommodations Tax. The Transient Accommodation Tax (TAT) would be increased from 6% to 7% to provide the additional private sector contribution. The Task Force also recommends that the TAT base also should be expanded to include timeshare condominiums. The expanded base would provide several million dollars more in additional funds. The Task Force believes that with increased public funding must come greater accountability related to the use of the funds. The Task Force proposes the establishment of an Executive Board to oversee the new fund. The composition of the Board would include public and private sector members and would have no more than eleven members, with geographic representation that includes neighbor island members. The Board will be responsible and accountable for all expenditures from the fund. All non-research tourism functions within DBEDT would be transferred to the new Board. All State tourism-related activities will be funded through the Board. The Board will also be required to make annual reports of expenditures and results to the Governor and Legislature to allow them to assess performance. Data gathering and analysis related to the visitor industry will be transferred to DBEDT in order to provide independent review and evaluation of trends in the visitor industry. Waikiki represents 70% of our largest-industry. It is the heart of the visitor industry and has unfortunately, lost its strong competitive position due, largely to a lack of investment in infrastructure and attractions. s ECO.~"UMIC RECOVER`' TgSf: FORCE October 2Z. 199 , To ensure that Waikiki remains competitive with other destinations, the Task Force recommends that a joint State/City analysis group should be appointed by the Governor and Mayor to address the revitalization of Waikiki. This group would consider • The relationship of Waikiki to adjacent areas ranging from Kakaako to Diamond Head • Additional infrastructure needed to support improvement of the competitive position of Waikiki as a world-class urban resort areas • Commitments to major Ala Wai improvement projects • Plans for private investment and actions needed to encourage investment ithe near term Also, the issue of the division of responsibilities between the State and the City and County of Honolulu for this crucial State asset must be addressed. The Task Force also recommends that anon-profit organization be established and funded to pursue a major league sports franchise for Hawaii. A major league sports franchise in Hawaii would provide a significant economic stimulus and help to promote Hawaii on a regular basis. STRUCTURAL IMPROVEMENTS TO THE REGULATORY PROCESS Hawaii's reputation for having a bad business climate comes in part from what businesses inside and outside the State describe as the lengthy and indeterminate time required for regulatory approvals and the duplicative nature of the approval processes. Although improvements have been made in recent years; ttiece~nust be su ss, _ f the States intentto improvetthe overall regulatory climate. The Task Force recommends that all permits and approvals have amaximum time frame for review and approval. The issuing agency or department would establish the time frame; during which action must be taken or approval is automatically granted. There would be an administrative appeal process that would take place within a specific time at the relevant level (the Governor for the State, Mayor for county). In order to eliminate duplicative land use processes at the State and county levels, the Task Force proposes the elimination of the State Land .Use Commission (LUC). Jurisdiction over State Conservation District boundary changes would be transferred to the Board of Land and Natural Resources (BLNR). The Land Board would also develop standards regarding other state specific interests relating to land use, such as contributions to education and highway infrastructure attributable to proposed land use changes on non- h a F.GO.`O.t[IC RECOt'ERY TASK FORCE Oc~ober 22, 1997 conservation lands. A single State agency or department (to be determined by the Legislature) would be responsible for determining that protect plans conform to the standards. A strong desire was expressed by the Task Force's Working Groups that all State and county agencies and departments adopt one-stop permitting processes, and permitting by general rule. The Task Force concurs and encourages the expansion of this effort at all levels of government. An existing example of the application of these processes is the permit streamlining undertaken by the State Department of Health. With respect to workers' compensation issues, the Task Force noted that there has recently been a 35% reduction in workers' compensation premiums. The Task Force suggests however, that additional action be taken to prohibit compensation claims related to stress from appropriate disciplinary actions. This would serve to address employer concerns related to the recent Mitchell decision. UNIVERSITY OF HAWAII The University of Hawaii has often been referred to as Hawaii's most valuable institution. It educates our young people, it provides trained workers for our businesses, and it provides research on aspects of Hawaii that not otherwise occur. That value notwithstanding, the Task Force and the Work Groups both felt that the University of Hawaii could play a more significant role in helping the State's economy to grow and diversify. One opportunity lies with the U.H.'s research organizations. Dr. William Ouchi, a Hawaii native who is author of Theory Z, and a Vice Dean at UCLA's Anderson School of Business, noted that the world-class research organizations at universities in California provided the foundation for three of California's major industries: 1. Agriculture 2. Computers 3. Biotechnology The key for California was in having truly world-class researchers and faculty. The presence of leading minds and facilities attracts venture capital and spins off entreprenuers. , FGO~'O~(iC RECOVERY T.>SK FORCE October 2?, 1997 The University of Hawaii ndeds the opportunity to have world-class research organizations in areas where we have special advantages such as ocean and earth sciences, astronomy, and tropical agriculture. Dr. Ouchi emphasized that an essential ingredient for a university to attract world-class faculty is autonomy. If the University of Hawaii does not become more independent, it will not be able to achieve its potential as a generator of economic opportunity. The Task Force recommends that: 1. The University of Hawaii be structured as aquasi-public corporation 2. Total State support be determined by the Legislature and Governor 3. The UH have the autonomy to set priorities, own and manage lands, funds and resources and hire its own legal counsel In return the UH will be in a better position to be 'world-class" in key areas, and to raise a greater portion of its revenues from non-State sources. In addition, to help the UH expand its global connection, the Task Force recommends that the University establish a Board of Visitors, with distinguished persons from around the world as members. It also recommends that the University explore actions, up to and including acquisition of the East-West Center, to ensure the continuance and growth of the East-West Center. HAWAIIAN ISSUES At the center of who we are as a society is the native Hawaiian culture. The sustenance of this culture and the betterment of the Hawaiian.people hinge on the~reservatlon of HawaiiarrTights;rtheTesolutions Dfiandztartns; andlhe complex issues of self-determination. Resolution is vital and requires that native Hawaiians and representatives from labor, business, govemment and the community come together in discussions of this issue for the good of all. EFFICIENT DELIVERY OF GOVERNMENT SERVICES A key element for an economy that can compete effectively is a government that cau-deliver services efficiently and effectively. To move Hawaii's governments towards greater efficiency the Task Force has four recommendations. 1. First, change the State government's accounting and budgeting systems. x a ECn`'O>ItC RECOVER" T.aSR FORCE October 2?. 1997 It is necessary to have an accurate understanding of how much government really spends for its programs. To do this the Task Force recommends that the State government adopt a GAAP-based (Generally Accepted Accounting Principles) system of accounting and budgeting similar that used by private sector organizations. The Task Force recommends that the State convert its accounting system from a cash to an accrual system which includes capital charges for fixed assets to promote efficient use of those assets. It is also recommended that the budgeting system be converted from an input- based system to an output-based system with tight specifications of the outputs to be purchased. 2. Second, reduce duplication of government functions. A major obstacle to an effective and cost-efficient delivery system of government services is the duplication between the State and Counties. It is essential that duplication be eliminated in areas such as: a) Highway and road maintenance b) Parks c) Health & ambulance services d) Human services e) Housing f) Civil Defense Significant changes can and should be made in this area. Notwithstanding the elimination of duplicative functions, parity among counties should remain as an impf]rtant n- h~prtiva _ The.level Of cPrvir•oc-~n~~~S-Shnttl of ha s• thctantiany-ditfierent in different Tn ar-triav - .c a mn~-nf -States County, and private sector representatives should analyze this issue, determine areas and methods to consolidate, and gain agreement on implementation plans. 3. Third, support cost-efficient government services through managed public- private competition. The Task Force recommends that State and County governments be enabled to implement public-private competition for government services through a managed process that determines whether a particular service can be provided more efficlently,~ffectively and economically by a public agency ores private enterprise. To foster an even playing field between public agencies and private enterprises, the managed process should consider all relevant costs in the selection process. 9 6C0~0\(fC RECO~'ERy' TASK FORCE October 22. 1997 , In addition, protections for affected State and county employees should be established, and civil service laws and merit principles should be observed. 4. Fourth, revise the State procurement code. While the Task Force recognized that the current State procurement code was intended to avoid certain abuses of the purchasing system, many persons affected by the code believe that it could benefit from greater flexibility. The Task Force believes that this could be accomplished while maintaining the accountability of the current system. RESTRUCTURE THE EDUCATIONAL SYSTEM We believe that education is a critical component of our economic future. We cannot expect to compete in the global economy without a skilled workforce. 1. We are committed to transforming our education system through reform, restructuring and reallocation of existing resources. • We believe that it is critical to adopt county-based school boards. School management must be closer to the community that it serves. The Task Force package replaces the statewide school board with four County school boards appointed by the Governor. Each county would have its own superintendent with a statewide superintendent serving as a coordinator. • Basic academic standards and guidelines would be set at the State level, but how to best achieve those standards--given the various needs of the local cr~~rnrwnities--wil - yshPn+r~~ndrtheir(div~~~ gal wools. Individual schools will be given more autonomy and responsibility by adopting school-based budgeting and by increasing flexibility in compensation and assignment for principals within the existing labor-management relationship. 1. We also believe that we must instill aworld-class focus on the Pacific Rim into the curriculum of all schools. In particular, we need to ensure second language competency for all high school graduates by the year 2004 and create aworld-class technology infrastructure and education focus in all schools. • Our goal is to establish computer literacy for all 8~' grade students by 2000. • To fund this program, the private sector commits to $10 million to provide computer/network technology in schools throughout the State. nl a ECO`'Ot11C RECOVERY TASK FORCE October 2:, 1997 2. The private sector also commits to fund Hawaii School-to-Work Opportunities program after federal funding ends in 1999. The School-to-Work program represents a structural change in the current school system, with attention placed on preparing students for careers. The interaction between all levels of schooling and between the schools and the private sector greatly improves the applicability of schools to the workplace. 3 We will propose necessary legislation to assist faculty and management in areas concerning: (1) discipline in schools, (2) performance measures at the school level, and (3) incentive compensation. The bottom line is that we must all do whatever we can to ensure that our children have the skills that will be required in the global marketplace, not only as parents, but as employers. RESTRUCTURE THE TAX SYSTEM The Task Force proposes a historic change in Hawaii's tax structure and rates designed to expand economic activity and create new jobs. This is done by shifting taxes away from production and income, and toward consumption. The tax package will lower taxes by more than $100 million in the first year and $200 million by the third year. The changes reduce the tax burden for all residents, while maintaining essential governmental programs and services. Specifically, this will be accomplished by the following: 1. Personal incometax burdenswouldbe reduced by 40 percent-.afterttlree years. The top rate will fall from 10% to 7% in the first year, and to 6% in year three. All other rates will be reduced proportionately. Hawaii's top tax rates will fall from one of the highest in the nation to below the average. With these changes, personal income taxes will be cut by $320 million in the first two years, and $420 million subsequently. Additionally, tax credits will be provided for those with low incomes. 2. Cut in half the corporate income tax and franchise tax rates. Corporate taxes would be reduced by $40 million in each year. This will make Hawaii's top corporate tax rate the lowest among all states in the U.S~hat have a corporate income tax. 3. Reduce the pyramiding of the GET--often considered as a tax on taxes- saving $158 million annually. Wholesale of goods and services for intermediate use would be subject to one half of one percent tax instead of FCO~O>1•(C RECOY'ERY TASK FORCE Ocmber 2?. 1997 the current 4% for services. This is a major issue with businesses, especially small businesses. Changes will also be made to place exported and imported services on the same basis as goods. 4 At the same time, the GET will be raised from 4 to 5.35 percent. Even with this increase, Hawaii's consumption tax rate will remain one of the lowest in the nation. The large reduction in income taxes and smaller increase in the GET will shift the tax burden-residents will pay less. A family of four, with the median income of about $40,000, will pay $340 less per year in the first two years and $634 less per year thereafter. In percentage terms, this represents a 9% reduction in combined tax liability in the first two years, and a 16% reduction thereafter, This tax package will improve Hawaii's economy. Hawaii businesses will be more competitive, and every resident will pay less taxes. The state will no longer be considered by tax experts and business magazines as having the worst tax system in the nation. We have followed the advice of tax experts from Stanford and other universities and business relocation firms and lowered our personal income tax rates and kept our tax on consumptlon low. As a result, Hawaii will become more attractive to out-of--state firms. Overall, the tax package represents a strong step forward in improving Hawaii's economic potential. i~ FCOYO~(tC RECO~'ER° Ta5(; FORCE October ?2. 1997 CONCLUSION Making fundamental changes is difficult. It requires afaith- especially in an environment where the focus has not been on measuring competitiveness in external terms. Hawaii has the most marvelous opportunities and potential of anywhere in the world. Where else is there the lifestyle and environment of these islands? Where else do we have the strength of people and diversity which is becoming the hallmark for success in the world today? And, where do we have an economy with the s+'~ngth and respect of the United States at the doorstep of the Pacific -the region iat holds more potential than the rest of the world combined? We have all the assets -both tangible and intangible -and the potential to benefit our people and provide them afuture -economically, socially and environmentally -unsurpassed in the world today. And we need to keep in mind that the challenges we face are very winnable. Indeed, it is very doable. There is no reason that we, too, cannot have a strong economy that provides real opportunities to all our people and at the same time not only protects but enhances our environment and culture. We have the opportunity to restructure our economy in a major way. One that better fits the new rules of the game. This plan is a package. It is not a compilation of individual actions. It will revitalize our economy, create jobs and make us competitive today. It will also ensure our children have the opportunity to live and prosper here in Hawaii. Through.all this remember the realLOSts and implications of maintaining the status-quo. Liking in Hawaii, we understand the futility of holdingl~ack a~reat wave. Change will be painful. We cannot avoid pain, we can only delay it. And the more we delay, the more painful it will be. The focus needs to be on viewing Hawaii not in terms of the "past" -the competition was internal be it business vs. unions, unions vs. government, or government vs. business -but in today's terms -Hawaii as a team competing against other areas of the world. In the states that have made changes, people said they deserved better, and the benefits have not only been economic. There has been social, environmental and educational progress, too. Hawaii needs to adopt this view. And, we can. i3 ::,,5~~_, 1-1:Sd Our TAX FOUNDATION O I H A W A I I ti molul u, f Ww°0 ?68:3. Telephone 0.1a45t17 I?t+ Quin S[ ,Suite J04 Diacussiun of Hawaii Economic Revitallzatfon Task Force Taxation Proposals Taz Foundation of IIawaii Sutama ry Preface The Hawaii Economic Revitalization Task Force recommardcd chmges to the general excise tax (GET), use taa, personal and corporate inwmc taxes, bank franchise tax, and the transient accommodations tax. The prim.uy goal was to "jump-start" dte stagnmt Hawaii rwnumy through structtua] chmge (see Proposals). Office il rclcaso of the Task Force examined by the Tax Fow~dation of Hawaii include: the press release cntitlx, "Hawaii Ewnocuic Revitalizalion Tack Force;'dated October l2, 1997; income tax schedule for joint rctums, low income tax credit schedules, rata chmgcs Cur the wrporate income tax; and examples of the effect of the tax packngc on ewe swdy families. The income tax proposals involve cutting marginal tax taus by 30% during the first (tax) year and by 40°/. during the third year. Tho rovenue loss is expected to be partiatly offse! by an increase in the 4% GET tau ro 3.33'/0. (n the case swdies provided, l3 is total, only one case resulted m m increase, albeit a very small iureau, in overall tax burdui. Aside Crom the S l38 million revenue estimate for the roctuction in pyramideA GET, revenue estimates for the other u~mpotieou of the plan wire not publicly available. Key PoinU - while inwmc tar, rates wall be slashed by 30°/. during dte first year and 40°/. during the third year, I}ic net savings in stau income taxp will be less than 3090 and 40% respectively ba;suse uC the deductibility of withheld stau income taxes; taxpayers who do not itemise on state rctunu will receive llic Cull 30% and 40% cuts, respectively; - cart studies canpiled by the Task Force to dtxnonstrau the impact of the package reflect withheld caeca wbw filing stau itrome tax returtts; howwer, the case studies tb not rtKlect inurnction with the Ccderal income tax; while state ittwme tax liability will decrease federal income tax liability will inucasc; state taxes exptxta! w lht federal govemmmt will dcercase, for those who itemize auclt as homeowtten who daluct mtatgagc inttrest on bout atau and fcdcrd income taxes; - dte oxport ability of the sWU utconte tae to the federal government is very Importmt; in a typical home owning gap-group household, S63,000 in gross income, 57,000 in mortgage _ interest and real property tax cxpcax, overall out burden (personal income * direct GET paid) would incrrnsc under the ctutmt Task Force proposal; it may affect the Task Force case swdics ncgativcly; the Tax Foundation Carttwl compuu this since the cases include assumptions which arc not explicitly provided; - the proposed irxrearc in dte GET from 4% to 3.33%jtut happens to Coincide with a 1983 state Tax Rcvicw Commission report by Bowen end Leung stazing this the efftttive tax on most gooSr attd sCrvit:tW purchastxl by residents is 3.3% and on visitors, 3.4%; the study noted that the pyiauriding c[fa.t war "smeller thaw those caruooNy claimed by critics of the gross receipts tax"; Pyramiding way found to be more sevtre on services than goods; - assuming that the Bowco Leung study is valid far 1998-2000 (the swdy was completed In 11'25. 11:55 ©03 - _2_ 1965 based on 1980-1981 dots oa the composition of the area emoemy), removing all pyramiding desrn'bod in the study sad increasing the GET rata to 5.33•/. would gtmerate tdc aaau level of n:vatt+ca that the autratt 4°/. gtaoaates; businuses would not bs paying less after pyramiding is ~tin,_. __-•^d, tax liability wwildjust be sluflul w the back and Of the transaction atreem: - the Task Force has not detailed rho mechanism by which pyramiding would be eliminated; in addition to the caveat that aU pyramiding should be dirninatsd, depending 08 how rsducing pyramiding is actamplished, the coat to comply with record kacpittg rsgnirsmaW may psrtially offset rho tax bmeSt; - timing effxts, effective dates will play a rok in dctamining where tax bette!'iu or I~.,.•<.K will fall; it is critical that the changes W withholding table t0 rcIIoet income tax tz+ta g0 into effect at the same limo that GEf itsCteaaea tape e~ct; tmless the tax cltengq to be approved by the 1998 state legislators are applied reaoaetively (for tmr year 1998), taxpayers will not begin to realize income tax savings untli 7mttety 1999; what impact will that have oa economic atimtdus? - atsumiag the overall revmtre Ims tatimatea arc ca:oct (•S 100 million during the first year and -f250 million during the third }roer), the eentel tax rsdtteafon m a per capita basin wotild be S84 is the ftrat year and 5211 in the thud year, as is, the Task Farce proposal will not 4ave ao impart oa HawnG's states at being artwng the top dive scarp with the highest per capita state and local gover®mt tax burdra; Per Capita State and Local t3ovemmenl Tax/Fee Burden 1064 Tax Ony Taut autd FN State Amount Rank Amount Rink New York =3,854 1 y4,588 1 Connawykul 3,141 2 3,882 4 Alaska 325 3 4,304 2 Nsw Jersey 3,218 4 3,785 5 HAWAtl 3,188 8 3,878 MeaaachuaNb 2,835 8 3,375 9 h/nnesota 2,733 7 3,581 8 _ VNaoonrrkt 2.886 a 3,324 11 Maryland 2.857 9 3.170 13 Washln6ton 2,568 10 3,351 10 U. 8. Awnarr 52.402 - 53,303 - the League of Women Voters of Hawaii anelysia oCihs gwcrd excise tax increase appear ~ stupaa; the talculadoa did not sooottnt far differeeces In the 0.5•/. aed 4% GET base: exported taxvicea tax exeu>ptiens, ttateaaien of the tree tsx to imported savioa; dte aoayais tloubls-crnmtad the pyromidieg aJ~ab of the GET fa viaiten; also, rho ailocstian of iaeaae tax and GET burden by income elsssas (tmda 540,000 sod over 540,000) does not take into acrauat size of hmrsehwld, home otvsiaahip, and nonexempt forma of Income sorb as pcesiao m. ~nviry ioeame; 11. S-'S i 1-1:55 Oh -3- - as for the incomo tax projatious, rho LW VH did not factor in the two low-income tax credits proposed by the Task Facer, tha LW VH estimate appears to be m honest effort to calculatt tht distribution of the tax cub and inurases in a vacuum of details concerning Sho Teak Force proposals - the GET inueaso may raise the tax burden of those taxpayers with large amarmta of tax- cxcmpt income, such as pcnsiotrs and Social Security, lu the extent that the inctsase in the refundable crodit (maximum S63) dar not offset the increase in GET paid - increases in direct GET paid on good and services only rcUect the tip of the iceberg; indirect GET is built into the price of goods and services; since the Task Potre package dos not climinaG+ all pyramiding, indirect G}rl' will continue a be a fxtor nod should be wagidersd when cnlculstiag the impost on haaxiholds e< various income le`els Conclusions - while the tnx rate decreases proposed for stale income tax rates are dramatic, the tax savings arc offset by the increase in the gcaaal oxcise tax - the overall impact on tax burden will be slight (las than 3% is the first year), the cast of doing business in Hawaii will na deerease very ttateh - in many tests. 6ouscholds will be paying a greater short of their income in total taxes bewusc of the reduced fodcral ol'flet due to iteatiad dcductiom like stare ittcpme tax withholding and mortgage intuat expense - the calculation of the distribution of tnX savings/increases made public by the league of Wumca Voters of Hawau is 0awod, in part dtte to assurnptiom whirb were roquirod to be made Ixr;ausc of the information vacuum tw the tktails of the Task Force raammeadatloaa - the method of clinrinating pyramiding will determine, to a large degree, how much net tax savings or increases individuals and businesses will realise - Icgislation to eliatinate pyramiding will have to be crafted carefully W inure that compliance costs will nut ufftct savings intended at intermediary stages of production rFtr. ruaaro~ 1 L'~=, 9S 1:56 005 Economic ReviLaliTition Taak Force October 2Z, 1997 Summary of Taxation Ftecommendationa Income Tax (I1RS 235) 1) decrease rnarghtal tax ratty in alto personal income taX by 30% during Brat two yeah; top marginal tax rate would be lowered 1Yaan 10`/. to T/°; marginal rates would bo qtr by 40% during the third year, lowavrg tha top marginal rate to 6%; 2) repeal curratK S27 refuundable food tax credit; 3) enact new graduated refundable low income tax aedit; 4) enact new graduated nonrditndabie low income tax credit based on modified adjusted groea income (MAGI); 5) decrease matganal tax rates is the corporate income tax by SO%, rcdudng the top marginal rate flbm 6.4% to 3.ZYe; General 1?xci:{e Tax 1) increase tax rate try 34% from 4% to 5.35%; (IBtS 237) 2) eliminate tartain pyromidtng effects; 3) eocempt sole of exported aetvicm; Transient 1) increase tax rate tlrnn 6`/° to Tl.; Accommodations Tax 2) earmark throo-aeventh~ ofrtvenua for tourism promotion (FIItS 237D) aetivitiea; Use Tax (IBtS 238) 1) impose tax (at 5.35% rate) on imported aervicw; Banks and Furandal 1) cut tax rate by 50'/e from 7.9Z°/. to 3.96%. Corporations i?ranchiae Tax (HItS 241) I rFx: »~aq~ i ~ ~ 11%::5- _ T 19: SG OOe~ Walter Mikfius, et. al. TADLC a. FF OERAL ]FFSET ANO TAn ET'.PO RTING (>nr~nnl 01 Tax Culix livn) - YAa BOln9 by Fetleral Hew9u R@910@ntl Tax h19 d! x oa T ~ A9 Aa IncOme Tay C~ilecli0n Onset Tounsb Olners Owners Total Consumer ReupienL- Stale Taaes ~ InJ~+NUaI InC011b 800790 to 09 IOO.W 2 COrDOreIE Income. 0nnxs, finenue Corps 72,9+0 tU.J7 t595 12.]7 12.87 a0.99 +t t@ tL85 ] ~nnartence d Ea~ate Q2a7 /W.W + Co nveyen0e a.B02 5.00 5.00 95.W i l3enerdl EAc1aa 9D0,720 tea 21 9a S.B1 7.07 71 71 60 91 + ]7 ~ Cwl 129,910 22 50 9 73 72.25 @7.75 7 puoli~ Srrvicr Cnn 61.+12 12.50 1J 20 25.70 7a.70 5 L].n Fsrmna ]7.271 +000 a000 @000 9 TJDaCCUd Litnnsne 2].719 1920 1820 9080 t0 ms~renob Crem um5 :5.77+ G<S 6.a5 9]55 ~ t T~anelent A,:WI ulludaliuna 707W 97 W 97.70 700 '2 N:p;Vr vel~~Uv (`Nyt Z Rvy) 19.17] +]J a.77 93.97 17. Ail Otnwre 20 100.E 7C : AL 3TATE 2 t2D 971 6 17 a7 1.29 2.27 27.98 72.91 7 20 C9unry Tau9 Real Proparty 795 579 12.90 0 97 + 95 22.71 ]S.T.a +3.93 to St I ~ S lAolor Veh10~e JIe~S nl :2.01] ? JJ a J7 95.67 '0 Unbry F.a1n:n,ea t9A07 12.00 IJ 20 25.70 7?]0 ~ 7 L Ou0r LIGbn9e S FD@9 t ee+ 1u OZ W 02 39 96 ie _i<rnsre, PMm10, Glher D 2B2 9 07 9 17 90 57 DOTAL COUNT! atOAtn. t1 J7 979 1.99 1921 7299 5177 1991 TOTAL 2.313.60] 7 t b 10 09 + ]J ?.9T 23 ]J 99.+e 3 19 I i 'o._ Fr Jt'm ;a v~Uet l~yw co aC pvlwnidyw ~~f lu :ulle•::Nn, ail ulhrla arr pel~rnlayea ul fAx t0~~rnaivll ~ea3 (CtlBi al tax OH]GI f~~:~" ~.]c~ 'a- ~11~=5F~' FIE'- iNlialINf! - t cHLr14.EI~U~ - - _ c.1 E C 0 N 0 M I C M ? i f ~ 1 M. ,i 1~~ . ¦ • ~ i ~ • r• r Governor's Task Force: An economic evaluation. This special issue of fconomiclndicvtorsanalyzes fhe impod o/recommendations byGov Ben Cayetono's Economic Revitalize6bn Task force. fiis group of business, government and labor leaders agreed unanimously to propose to the 1998 state Cegislamre sev era/ major initiatives (Details o(the proposals an Page 3). A tax cut for Hawaii? Unheard of, maybe. But real. by Dr. Leroy 0. Laney, Sr. Vice President & Chief Economist, First Hawaiian Bank ne center- increased from 6Se to i6c, in order to measures will overcome the incress- piece of help finance a larger, earmarked ingly negative image Hawaii's busi- ~the initia- marketing fund for the industry. ness climate has developed in recent rives of the vests. Corporations create jobs, and Governor's Tax reform redistributes income. Hawaii has been losin obs for a Economic Who wine and who loses? record five years. g ~ Revitalization "ate all major tax reform Corporations come in sizes from Task Force is packages, some segments of the econ- large to very small. Corporate tax tas reduction. osiy make out better than others. relief - in this case, cutter the rate In high-tax ~ Corporations ccin. Is that in half -isn't just abig-business Hawaii, that bad. Surely not in an ernnomy that sin ip itself is desperately needs to attract external g ~ workers win with lower news. It's the first m or tax reduc• capital now. Some day, maybe we'll ~ overcome our guilt complex that Personal taxes. Those in the lowest tion package to be seriously consid• profit" is a dirty word -especially income brackets gain proportionste- ered in Hawsu in modern times. because profit is getting more and ly more because proposed income Relief would include lowering mare rare in Hawaii. tax credits would give them addi- personal incrome taxes by 9096-40% Only genuine and substantive tional relief. Households earning and lowering corporate income taxes less than 510,000 would pay zero by 5050. Part of this revenue loss is to co~tinaed on page Z be offset by raising the General Excise Tax (GET) rate from4% to 5.35rio. However, the much-criticized pyramiding aspect of the GET tax - the compounding effect of fazes paid 'a ~ on taxes at all levels of the produc- tion process -would be eliminated. Hallfr?~/ S ~ Also, exported services would be exempted from the GET, but the tax w~~~~~ would now apply to imported goods and services. Finally, the Tourism Accommodation Tax (commonly Economic Revita/izotron Task forte known as the hotel taxi woc'.d be 'i1 i ~hPri 'r IRS-~•:7.tii.~ty ~aL~7<EV~UA A tdX CtJt f01' HdWdll? continued from page 1 income tax. Bigger after-tax pay- Sample Hotel/Lodging taxes County governments lose, checlta mean greater incentives to because the marketing funds would work, ssve and consume. - reduce hotel tax revenues now sllo- • Consumers would pay..s 6 Bated to the counties. To make up V 75.Q•! ISJ4 n.M4 higher GET. Ahigher GET is ~ noK the ditierence, counties may have "regressive," as all sales taxes are, a ~ p„~ to make cuts or find other sources Poor people pay the same percent 3 a w one - of revenue. tax as rich people, but consumption ~ q µ c.cK But reinvesting more hotel tax ;pending is a higher percentage of ~ ~ s.nro ~ g; ~ ' revenue in the industry from which poor people's incomes. ~ s ~ ~ ~ n it comes makes economic sense. In Yes, there's just no doubt about ~-i ~ ~ fact, draining it off to other uses it: Other things equal, you really ° ,...LKI,~,....", has long been criticized as ineffi- are better ofY in this world to be cient public finance. rich than to 6e poor. But the price higher GET. Non-resident tourists Why are gasoline taxes at the of anything, taxed or not, is higher pay relatively more of the tax than pump often used to fund road con- relative to income for the poor than in non-tourist deatinstions. In struction and repair? Because the rich. And historically, utopian other words, we "export" about 40~ those who use the roads ought to efforts to redistribute incomes of the tax. That's not wrong if pay for their maintenance, not nan- drastically in the name of greater tourists are here using our public drivers. It's s similar principle. equity hsve been disastrous. services along with residents. Here the tourism industry- is And on this regressive aspect. Our hotel tax is still far below the main beneficiary of a tax it is let's also not forget that the tae that in many world cities. And, sa forced to pay, And using hotel•tax reform proposals hsve both income Gov. Cayetano said recently, the money to prime the visitor industry effects as wall as price effects . impact of an incremental hotel tax builds in incentives for success. If Items may cost a little more, but - increase is queationsble. "If you funds are used wisely and market- because of income tax relief -con- want to go to San Francisco, you ing campaigns are successful, more sumers at all levels would also don't say'What's the hotel tax?" tourists come and that means more hsve more after-tax income to pay Cayetano said. hotel tax revenues down the road. for those items. The net of the two Our biggest constraint is that • Exporters gain by not hav- changes (income tax down, GET Hawau competes ss a voluntary ing to pay the GET on services to up) is a gain for every resident tourist destination, not a major customers out-of-state. Hawaii has taxpayer, urban center where business trav- long wanted to diversify its export From a broader perspective, elers find the tax easier to swallow. base awry from monolithic higher sales races and lower The visitor industry itselY tourism. This would help. income taxes encourage savings at a-ins. There was wide support • Importers lose if they must the expense of r~*+~~+*ptioa. among Task Force members for the now pay the GET on items~ttr- Higher savings means higher proposition that Hawaii's visitor chased ontof-state. For one-exazz- investment and capital formation. industry needs more money for plc, Hawaii is fertile ground for A larger capital stock means marketing. And that money needs mail.order catalog sales, sad most greater labor productivity. That to come from a dedicated source to of us check our mail to find several leads to higher wages and lower provide greater certainty and less such catalogs a week. One drsw- inflation, sad so on micro-management from the politi• back: this one would be hard to Not a bad progression, especial• cal process. enforce. ly with today's demographics. Presently, the Hawaii Visitors Bottom line o1 other proposals: Saving gets to be a higher priority and Convention Bureau gets $24.5 d mare effident Hawaii than consumption as baby boomers million a year from state govern- First Hawaiian Bank's mature. ment. The money Hawaii spends Business Outlook Forum this year • Visitors to Fiawaif would for tourism marketing is patheti- hammered away at the paint that pay mare. In today's globally tom- tally below sums spent by competi- I.~w,~ just isn't as efficient in petitive tourism environment, rela- for destinations, using its resources as a lot of other Live prices count for a lot. Mexico The Task Force proposes to give economies are. The Task Force and Southeast Asian destinations the visitor industry about S60 mi4 came up with several ideas to make ---especially with recent currency lion annually (based on 199 i tax the gears mesh more smoothly. devaluations -are cheaper than estimates), with 9041 of that epecifi- "One stop" permitting, Hawaii. tally to go for marketing. Part of with time limits set oa the But the existence of the the $60 million would come from approval process, would eo a long tourism sector in Hawaii actually the 1 percentage point increase in way toward eliminating the regula- makes it logical and advantageous the Transient Accommodations Tax to raise public revenues with a (hotel room tax), conhnucQ on pagt 6 'Historic agenda for change' Tax cut, more tourism marketing, education reforms proposed $100-million-s•year tax cut, a be exported to tourists, who pay Dedicated tourism mar- drsmatic increase in tourism about 4090 of total GET collections. keting. Dedicate 3 percentage arketing and re-focusing Eusinesses would save S158 mil- points of the hotel tax for tourism public education are among propos- lion by reducing "pyramidine' - marketing, providing $60 million als unveiled recently by the Hawaii the tax-on-a-tax effect of applying (1997 level). Economic Revitalisation Task the GET at wholesale-level trans- Tourism board. A new Force. actions. executive bosrd would oversee The Task Force was convened Corporate income tag. tourism marketing. by Gov. Ben Csyetano, Senate Cut tax rate in half (From 6,490 to WaiYiki renewal, Create a President Norman Mizuguchi and 3.2%), putting Hawaii rate lowest joint city-state Waikiki group to House Speaker Joe Souki. In addi• smong all states with s corporate encourage investment in Waikiki, tion to the three political leaders, income tax. including Ala Wai improvements. its members included 23 leaders Strengthen tourism Regulatory improvements from business and labor. Hotel tax. Raise Transient Businesses have long criticized After more than 30 meetings Accommodations Tax (hotel room the lengthy, indeterminate time over three months, the panel con- tax) from 6% to 796 and broaden it to re aired for rewlato a eluded that the state's seven years 0. o ry pprovals. of stagnant economy 'stretches any include time-shsre condominiums. Eliminsting unnecessary grid cost- conceivable definition of a cyclical continued on page 4 downturn." The Task Force pro- posed that the Leo slature enact a Income tax rate reduRion series of bold structural reforms (Married filing jointly) that Csyetano called "an historic ,Taxable Yea 1 Ycar 3 agenda for Change." Income Current rate Top at 7% Toy at 6°6 Highlights of the proposals: SO-x3,000 2.0046 1.40% 1.20% Tax cuts, restructuring $s.ooo-$s.ooo a.oo% z.5o% 2.40% Every resident would get tax $5,000-$7,000 6.0056 a.205n s.so% relief Personal income tax burden $7.000-511,000 i.25% 5.08% 4.35% would be reduced by 404c, ar 5400 511,000-$21,000 s.00~/0 5.(i0% 4.80Ae million a_Rer tl~.ree yeah. A family $21,000-$31,000 8,75% 6.13% 5.25% with $40,000 in taxable income $31,000-341,000 9.60% 6.6646 5.7046 would save S340 in each of the first Aver 541,000 10.00% 7.00% 6.0056 two yeazs, and $634 annually after Note: Capital gains top rate at 7.25% reduced ea 5.089e and 4.35% jor the new top that. 7% and 6ffi rates, respectiurly. Businesses would save taxes and become more competitive. Hawaii would be more attractive to out-of-state investors. • Personal income tax. Cut Tax credit for low-income workers top rate from 1046 to 79'c immedi- Madifed Ccedk u a Avenge ately, then to 6% in three years. - AGI• % of rax tax liability Tax credits would wipe out all L'p to $10,000 100% $160 income tax for families with income6 under $10,000, and give 510,001-514,000 754a $420 additional relief to families in the 514.001-EI6,000 50% $600 $10,000-S20,000 bracket. 516,001-$20,000 2546 8850 • General Ezeise Tax Above $20,001 0% (GET). Increase rate from 490 to "4fodiCed AG! (SL4GD=Taxable income plus social security, nontnsnble penswn, ~.359a. Much of this increase would welfare, tax exempt interest worker's compensation, acholarehips, business losses. SDFCIQ fOtIIOH Fmnero~.c ind~urors-C:uce 7a. '.4c a ~T ya..an~n a~-~ 'Historic agenda for change' continued from page 3 ly dupiicstion and delays would Improve public education Principles (including sKitch to send a strong signal that Hawaii Major structural changes accrual accounting) to provide a intends to be more business- would decentralize public educa- clear view of the actual costs of friendly. lion, empower individual schools government services. • One-atop permitting. and focus on technology and sec- Reduce duplication of gov- •Time limits. Setting s time ond-language instruction. ernmenc functions between state limit on how long it can take to • Appointed school boards. and county jurisdictions in such approve or deny a permit. Establish four county school boards areas as roads, parks, health, • Eliminate the State Land to be appointed by the Governor, human services, housing and Civil Use Commission. and funded by the state. (This Defense. • Workers' compeasation. would require s state constitution- "Managed public-private Prohibit workers' compensation sl amendment to be approved by competition" in the delivery of claims related to stress from appro- voters.) government services. Install a priste disciplinary actions. Adopt school based bud- process that determines whether a geting. particular service can be provided University of Hawaii autonomy .priority curriculum more efficiently, economically and Allowing more autonomy would help position the University of goals: (1) Second-language compe- effectively by a public agency or Hawaii as the preeminent institu- tency for high school graduates by private enterprise. In the process, tion in the world in key areas to 2004, (2) Computer literacy for all insure that civil service merit prin- help drive the local economy. Sth Fade students by 2000. To ciples are upheld. • Make UH aquasi-public help reach this second goal, the Revise state procurement private sector commits $10 million code to provide more flexibility. corporation with an entrepre- to help provide computer technolo- neurial approach and autonomous Hawaiian claims gy in all public schools. control over lands, funds and School pttincipals. Allow Resolution of native Hawaiian resources. claims and self-determination • Establish an advieo incentive pay for principals. Allow ~ more flexibility in assignment of issues is vital. Native Hawaiians Board of Visitors from the Asis- principals to match individual and representstaves from labor, Pacific region. school needs. business, government and the com- • East-West Ceater. Explore munity must come together in dis- ways the state could help keep the Government efficiency euaaians of this issue for the better- Essc-West Centez alive, including Cost aeaountdag. Use meni of the eritir'e cammuaity.I~ possible acquisition by UH, Generally Accepted Accounting EHeRs of tax rate changes on family of tour (Change in tax liability relative to 1990 1st year 2nd year 3rd year Top marginal income tax rate 7.OO~k ?.00% 6.0046 General excise tax (GET) rate 5.35~io 5.35% 5.35°k Income tax effects only{Taxable income $40,000) - -$818 -$818 -$1,126 -31% -31% 113% Combined income tax and GET effects (Taxable income $40,000) -$340 -$340 -S634 -9% -9%a -16% Note: Includes effects of concerting refundable food tax credit to low-income tax credit and new non credit and new nonrefundable low-income tax credit based on modifted AGI. Sitrl~t flllfiON FuromK ~na:GtCZ-Ottehe~ 7r '79 ~ C ~~sr +aw.iu~ ea~1 'We're in it together. Give these proposals a chance' by Walter A. Dods, lr., Chairman & Chief Executive Dfficer, First Hawaiian Bank The task force and its working Clearly, the task force cannot groups had small-business repre- produce instant miracles. Hawsii is sensation, and s numbez of the pro• not the sole master of its fate. We posals directly benefit small busi- are one small part of a global econ- ness. r150sr cut in corporate omy in which our future is buffeted income taxes. for exam le. "One- P by tax hikes in Tokyo, unempioy- s[op permitting' in Mate govern- ment in California and high-tech ment. Improvements to education developments in North Carolina. that will pro~lde better-trained Nothing we do here will elimi- workers for small (snd big) busi- pate competition from other resorts ness in the future. or cruise lines. Nothing can alter • Defending the status quo? the fact that economic options are Hawsii's status quo means limited by being 2,500 miles from fewer jobs...too many businesses anytivhere. Nothing will bring back going under... too many people Eig Sugar. pulling up ;takes to move awry. But if we keep saying "there's W::o in their right mind would nothin we can do," we will do A lot of people were skepticsl defend the status uo? The status s when Gov. Ben Cayetsno 4 nothin,. The task force resolved to asked two dozen business, quo must change for my kids and do something, That something is yours to have an economic Cuture bold and radical aurPe labor and political leaders to serve a t'y on an Economic Revitalization here. Hockey star Wayne Gretzky's Task Force. I myself hsd doubts, The task Force proposal; are coach once told him: "You miss 100 even though I agreed to be a task certainly not ststus qua. They sug- percent of the shots you don't force member. Best the biggest tax cut in Hswaii take." The proposals of the I'm not skeptical any more. history. They would shake up goc- Governor's Task Force are the best Rather, I'm exhilarated by the leg- ernment. They represent new shot we have todsy to turn around istative proposals the task forte thinking by labor unions. And Chey Hawaii's economy. These proposals has proposed. I'm encouraged that, call on the private sector to pitch in hsve the potential to be a real eco- after acandid and stimulating dia• as well. nomic stimulus, but it's also a Logue, we troted »nan;mously for 'Just politics? package with a conscience. It will Mistrust of hticians is one the package. Po help people at all income levels - Afrer seven lean ernnotnic of the fahnc of cynicism wipingoat income faces forfanulies years, it's understandable that Grit- thst has engulfed our Islands (and earning less than $10,000, ics don't expect much to change, much of the nation). Any effort to I hope legislators will be just as The Governor's Task Force is too improve things runs up against bold ss the task force was, and not "Big $usiness," they said. It will this tide of deep public alienation. let the proposals be nit-picked to only defend the statue quo. It's just Surely, Hawaiia people have death by narrow interest groups. smple evidence to lack confidence I encoura a ou to learn more politics. g Y Let's look at each of these ~ the political structure: Declining about the proposals, by attending criticisms. job count. Increasing bankruptcies. 'Ibwn Meetings at which they will • Big vs. small business? Little construction. Shaky tourism be discussed. If you support these If we keep ssying "Big Is numbers. Unfortunately, the lack of ideas, let your legislators know. Bad/Smail Is Goad,' I suppose we confidence becomes a~lf-fulfilling We're all in it together -big busi- can convince ourselves that a quay- Prophecy. If consumers and busi- ness, small business, tourism, labor ness investors have no confidence and overnment officials. rel between big and small business g is at the heart of our economic in the economic future, they won't The status quo won't cut it any problem, It's nos. consume snd invest. more. w Yes, of course small businesses It's time for us to temporarily are crucial to our economic furure. suspend that ingrained pessimism They play a major (snd growing) and love these proposals a chance. role ~n our economy. It's time for us to believe that there can be hope. fPECUE ((NriON ICJ^b^~2 •nCK.TGr.-0GObCr 3!, 1951 V FG ~av.t'd' _ Bulk Rate _ U.S. Postage PAID Permit No. t l Honolulu, HI E I~~IwwIIC 0 N 0 AA RRI C ~LJr~~~~~~l~~~~ For ,more informaUOn or a free subscription, please write to: Research Department ~C 8cx3200 rOn0lulu, Hawaii 96847 O 1937 First Hawaiian ?3~Y, A tdX Cllt fOP Hdwdll? continued from page 2 tory hurdles that so often frustrate making it s world-class institution. nomic incentives to balk at several developers: This is another propos- Higher education is one of Hawaii s recommendations when it was al that should bear fruit in attract- most logical exports. The many their o:t that was being gored. In ing muetii needed outside capital to potential spin-offs :nom s success- the end, however, al] of them Hawaii, ful university can psy msjor divi- bought into the whole package • Eliminating the State deride far local diversification in after significant compromise and Land Use Commission should the next century, sacrifice. also simplify the development Renovation of Waikiki, Some will say the proposals process by focusing zoning and flagship of our most important don't go faz enough in some areas. other land use decisions in one industry, would surely help our lag- Others may feel they go too far. place -county government. The ging construction industry. Even if the package has imper- State's Board of Land and Natural fectiotts, the consequences for The stakes are high. Resources would be responsible Hawaii's economy of its rejection only for conservation district Failure Is worse than no attempt. are terrible. It will mean we as an boundaries. will these recommendations economic community do not have • Eliminating duplication become reality? Dlothing is assured. the means or the discipline Lo put of services provided now by bo-fh But clesrly the stage for success in our owl economic house in order. the State and the counties would the 1998 legislative session has And that will be such a negative remove another often-criticized been set. signal to the world that we might characteristic of an over-governed The unanimous agreement of a have been better off had we not economy. diverse cross-section of leaders tried at all. • More UH autonomy. (including the Legislature's presid- What will all those negative Allowing the University of Hawaii ing officers) is the moat critical ~~es in the national media say to manage its own lands, funds, aspect. A number of Task Force about ua then? and resources should contribute to members from both business and organized labor had selfish eco- S/ECUf f0lTlQN Erona^.¢ ^]ic:'oq-CnCCer 7!, 1991 ~F. `a«alun da~~ How to Return $2:60 Million a Year tc~ the Pea le as~ Lower Taxes. ls~ Prestructure Government t~~ save $80 million. 2nd Reduce Hirin$ to save $180 million. Details follow. io The Fiouse Republican caucus E:ncS >,lacruavetli's ttunking a poor reawn for retecnng reorgaruzarion. We are am th:;,g but 'lukewarm" about the need to reorganize government for greater effiaencti•. as demanded by the public and as called for ~n Act 297. Governor Cayetano's own budget director has suggested returning government to the 13c~ share of the State's economy it held when Governor Waihee ca:rrte to office. To return to 13`~~ from its current 18%, State government would have to shrink its share of the general fund by $650 million. Repu'~licans believe Hawaii deserves the increased efficiencies and eliminated duplications that could save our people 580 milUon next year. This ~s an achievable objective. Over the past two decades, private business has undergone major restructuring to reduce costs and increase effidency. Business employer:. and workers have offered to share with govertunent the valuable experience they have gained increasing efficiency, if our leaders would only ask. The crocus recommends looking for 580 million in savings from the following: • Reorganize the business-related departments as called for in Act 297. ~vin~ P.~II i11i0n. • Atr~lish the Personnel Department (going farther than Act 297), since each department has its own persotutel offices. ~~t~s: S36 million. • EIunittate departmental public relations personnel and departmental annual reports. ovi_nes: ~ ;ttion Elunutate State building leases on places like the Hetnmeter Palace and put wo;~kers in existing State buildings. • Sl. ~ ion. • Retlre State vehicles, paying milage for official travel Instead. ;~yittes: S6 mWiQn. • EIunlttate the Land Use Commission, and other State [unctions that duplicate jobs done better at the local level ipgg: 51 m;t!'on+. Repub:icans aze seeking $260 million finance job aeating tax cuts. Our plan believes government can find the b180 million balance by reducing new State hires over the next year. 2. F:educe Hi---n~ to Make Government Leaner. ]"e can change Hawau's future by reducing the size of the Y 1,/ government to fit our downstzed economy. Governor Cayetano made a start during lus first two years by cutting 3,000 State positions. Unfortunately, to prove a point, he cut working people with fam~li~as to raise and mortgages to pay. This ~s a mistake economically as well as socially. According to the State's Chief Economist, every government , person fired creates only'i a job in the private sector, Firing people is not only undesirable, it is also unnecessary. Since in the average year 4,000 people leave State government, we can cut 4,000 positions without firing a single person. reduction of 4,060 positions will provide 3180 million to be returned to the people as lower takes. Because the State allocated funds for 900 new positions, any restru~:turing could place 900 new hues in the most needed 4,000 positions vacated, while persons transferred from elsewhere in the State could take on ocher positions that must be fiL'ed. It will be harder for those left behind, but the challenge aeates a wonderful opportunity to invent a leaner and more effective workplace. Overlapping functions can be combined. Unnecessary functions can be eliminated. Most of aU, the State can shift from atop-down, conunand strucnue to teams that empower every member to take charge and make decisions, all in the interest of better serving the public, government's custor:ur. There are ways to measure how well government is doing in serving customers, just as the "bottom line" and return on investment measure busiturss performance. Departments should be measured by outcomes, not by budget size or numbers of employees. In fact, many governments already use outcome-based budgeting. Forme r I~1ew Zealand Deputy Prime Minister James McLay who recently spoke to the Governor's Economic Revitalization task force, noted that his coundy's rapid economic growth occurred only after P1ew Zealand's govenunent changed from a system of control to one based on performance. ri fvlew Zealand requires eac:i department to sign a cor.~act with the ['rirre ~tiruster protttiseng to delis er a Combtnahon of services and goods at a certain price. When government p~~rchases outputs and measures outcomes, ~icL iy sacd, then everyone knccvs what's working and what isn't. Oregon's success with "benchmarking"-government and the community jointly setting atime-specific goal for changing a measurable performance indicator-is the basis for the Ke Ala Hoku community benchmarking effort underway in Hawaii today. Ke Ala Hoku's several partners include Aloha United Way, the Hawau Chamber, and the Stare, althcugh the State has yet to embrace benchmarking as a tool for measuring government performance. Maui County is now budgeting by outcomes. Each department prorruses to reach quantifiable outcomes in return for using a quantifiable share of the county's resources. Maui monitors depaztment performance on a quz.rrerly basis, with the reports available to the County Council as well as the I\iayor. To improve customer service, business has reinvented itself into leaner, more effective teams. Government must do the same. Every school should work as a team, so should every prison, every division, and every office. Work reams should cross old bureaucratic lines. The defensive refusal of the State to impement Act 297 makes it clear that a sense of crisis has yet to hit Hawaii's Stare Government. Local people are leaving, because they cannot find jobs here. The private sector is dowruizing to deal with a smaller economy. The time has come for government to become leaner and more effective. Reducing employment will chaAi~nge each department director to reorganize for greater effectiveness. Hawaii's people want leadership to aeate jobs for working families. The answers are before our noses. Three simple steps will put job~reating motury into dreulation: 1) Return Taxes, 2) Restructure Government, and 3) Reduce Hiring. Our 1>lan shows how Hawaii can create a place where our children and grandchildren can afford to live. 9/16197 . +r ChdR I Govern~~r's Economic Revitalization Task Force Tax Package Pro osed Tax Cuts: Personal Income 5285 million Low Inec?me Credit 5 35 million Corporate S ~0 million Total S3b0 million Proposed Increases: GET 5260 million TAT S 20 million County Property Tax S 40 million (to cover lost TAT) Total -5320 million S40 million Goverlior's Net Stimulus to Economy: $40 million Republican Stimulus to the Economy: $260 million !t r U ~ _ ~ ~ o 1 I I! I I I I _ ~ ~ ~ a 1 1 I I I ~ ~ I ~ N ~ ~ ~ 1 1~ ~ i~ ~ 1 v ~ 1 ~ I I W 1 N y I i 1 ~ ~ i~ ~ c~ 1 ~ z} 1 W ~ 1 I ~ 1 8 Z 1 W 1 1 ' 1" w~ 1 w > 1' O ~ r V' ~ i ~ ~t ,R ~R ~R ,R ~R ,e yytt ~R w Q 3 is i~ ~ ~ r Fi ;~i ~ b ~ is ~ ~ 7i ~ir ~ iii K b H is - - ~9{~+~wp.-e.-~~nn vo ry moo C O N ~f ? M N~ O N ~ S ~~~~~~~x~~~~~~~~~ ~w e+~+NNNN~---oooo O A P100 0 ~hSi ~ NOtyh 0S!A ~$~~~iC~3~~St8~~8~e8 ~ - I` M rI Y Y Y Y YI ~i~a~wr?•-oggefqoqaidoa¢o 's ~ t~~rr goey.row~n ~Q'~~~v~i'Fj'$'o~q ~ +~ii~~~t38~~i3~NR~~~N~a VMYYYrIYYYYYY ~Y~lV IVNNOq~~~Qq!gftRR~6 i- ~ ~ Z r~ r r r~ ~ w f ~ ~ ~ r ~ r r r r r y.! g~ s~~ (~{t11t1~.lORAMw10MON~at~O t~ f I~ ai a R ~~1~a~~ ~~~~~«~N~~~~~i y< ~ tiw~I100r~01~OAgl~~I11?~O « j: ~~8~~$~~~,j$g~~e~4~~~ rIN S~~SNN~{N~..~~r.. a• w SS~ ~~~~~3~~~8~8~~~8~:6 ~ S tr r ~ ~ r-~ ~ w~ ~~-'rte ~ i1 x • • • r Y~ yy L 7 ~ ~ • • ~ T ~ V ~ ~ VJ ~ N S :J ~ 7 ~ • 1 n ~ O y ~ ; ~y Y N Gl ~l ~ Ol :n • ~ d ~ T S C Y CI ~ Q ~ ~ 3r ~~g' ~ n c `0a 3~ ~gytEi_~ ~ ro 3 w$ = ~ry'~ei" A,`c~ ~ ~ ~ ~ ~N~ v~ y~~ d ~ ~ O h ~ T 4 C~ ~ G ~ C ~ ~ w N G ~ ; ~ 01 x ~ ~ O O ~ ~ ~ ,n L y cc Tr O ~ C ~ C ~ G N i fO ~ ~ ~ X~ i R~ 1'- Y in "'f `~S wnj Ong v S~ ~ ar; ~ Vr ~e ~ g53 ~ d~ r. u N= c ~ ~ ti x y T G ~ yq 7y~ x 9 ~ ~ • ¢ ~ O O ~ r~3f' ~ ~ s r~~ 5;~ ~ o~a~ ~ 3 i6. of ~ , • •t~ ~ d c 8~ S$ 8 ~ C M ~ ~1 ~ ~ ~ D ~ P ~ ~ ~ O ~`l ~ ~ ~ + ~ ~ ~ ~ ~ L O N ~y ~ 1 $ S 7~~ g.g ~ „ a A ~ ~ 1 ~ ~ s~ ~ ~ ~~~~a~ ~ ~ ~3 v m~ a ~ 'S a 8 x iS ~ ~ ~ m g~~ W ao o ca ~ ~ ~ A ~ any a ~ ~ ~g ~cm~ m~~~}~ C O Q N N r N _ W cps ~ y}yf~ p Ji W~ m S C ~ ~ (n N ~A N N ~ L3$ ~ ~Of ~ ~ C {~JI{(S ~ C ~ ~L 7 ~ ` ~ ~ ~r/~ ~ V ~ {Gp 4 pf Qqa 3yJ i~ tO ~ ~ ~ 7 ~ ~ ~ ~ ~ ~C ~ N V 7 ~ _ ~ ~ A 1e~~ ~ ~~~yy aa V • N T N 1~ M~ N M ~ ~ ~ ~ ~ ~ U1 7 O ~ ~ g b~ ~ N ~D ~D f~ N a f9 S ~ .f7 ~ ~ ~Ee y a~' _ ~E ~ y q E.D~ Nf~ O~ M ~ s S b N f (f d o A '3 ~ ~ a Governor Ben Cayetatto Dear Governor Cayetano: l was ver)~ encouraged by the initiati~rs presented h~. the Economic Revitalization Task Force. Howevzr, after I (canted specific details of the tax proposal, I became a little disappointed. The specifics of the tax restrucntrut~r were not presented by the Task Force on Wednesday. More specific items appeared the next day in the Honolulu Advertiser dated October 23, 1997, t also met with your Tax Director, Mt~. Ray Katnikawa, who confirmed that the t:''-apltic presented by the 1-lonolulu Advertiser was correct. Accurdiugly, I want to express same grave cuncetns I have for the tax proposals. 1) T1te sunultaneous increase in the 1~rausient Accoi,unodations Tax (TAT) and the General Excise Tax (GET) represents too large an increase for our visitor market. Since these taxes will be directly eternized on their hotel bill;, an increase from 10% to 12.35% (23.5% increase), these will leave a lasting impression of distaste on our visitor market. As an experienced traveler myself, 1 always critique tax rates charged me against municipal amenities offered. Based on data from DBEDT and certain assumptions f made, it is estimated that tourism's share of increased taxes could amount to more than ~?OU million. An increase in the GET alone will significantly impact visitors share of taxes, since they account for approximately 23°l0 of total taxes in 1-lawaii 2) The increase in the GET from 4°~~ to 5.35°~~ amounts to a 33.75% increase in the retail rate or approximately a S2 l6 million increase. if this increased rate is applied to services, it could generate another S75 million increase. The increase in the general excise tax rate should be contingent on the significant elimination of die pyramiding effect of general excise taxes at the wholesale level According to the Honolulu Advertiser graphic, the cut in tax rates £or wholesale services will represent an insibmificant elimination of the pyramiding. The only application of the reduced rate on services will be on suviccs which is a direct ingredient of a tangible product or vt essential component ofanoth~r scivice. Sen~ices which are included as overhead in a business is excluded. There is crrtainly going to be a problem to defusing services which are "direct ing~edirnts'• ur "an essential component of another service." Unlike tangible goods, seniors cannot be easily tracked into the finished product as a direct ingredient and there is very little likelihood that direct labor will consist of outside ~eivtces. As far as beine included as an essential component of another service, this will also br an insitmiticant amount. Jud~nng from the work my firm does for individuals acrd businesses, it would seem that less than 1 % of my bTOSS revenues would qualify. I propose [hat a 1/2% rate should be applied on all inter-business services. Inter- busu,ess services would include all services provided to a trade or business as defined and evolved tinder the Internal Revenue Code. Why should a self-employed person be assessed a 4°% rate when Iris counterpart employee on payroll is not subject to the same tax? How cart we attract high tech services unless they are only marketed outside of Hawaii? We cannot cut Costs of doing business in Hawaii without completely eliminating the pyramiding. 3) My proposal regarding broadening the tax brackets ~~~as not addressed. Equally disappointing is that the highest tax bracket should be triggered at a much higher level. We do not need to reduce top tax rates to as low as 6~b. More importantly, we should be lowering rates i~f lower and middle income families, especially, to spur consumption spending. Also, for lower income taxpayers, refitndable credits should be employed. These monies will go directly back into the economy tluough consumption spending. 1 propose using a 4°~a rate up to $41,000 of taxable income, 6% frotn $41,000 to $100,000, artd 8% over $100,000. Earned income credits should be given to low incoute taxpayers of up to $21,000 while exemptions and standard deductions should be increased. 4) Why cut corporate income taxes in half when we have one of the lowest rates in the country already and is a small portion of the State's revenues? why not simply repeal the corporate tax and tal:e advantage of the public relations impact? The minimal $20 million we would lose may be the cheapest ad campaign we could possibly get. With LLC's more prevalent now, corporations are now avoiding corporate taxes anyway. Also, elimination of the tax would reduce administrative and processing costs of the State. 5) The biggest disappoinunent is that this package seems as if it is revenue neutral and may even be a tax increase when you add the pyramiding effect of the general excise tax. Despite tl,e personal tax cuts, estimated by tl,e State Tax Department as $400 million, this appears to be only a refonnaning of the tax base with the potential of a tremendous tax increase and bigger goverrunent when the State's economy improves. Let's have an unofficial target rate where the State's revenues are 15% of dte Gross State Product. Thank you for allowing me to serve on the Task Force where my views could be heard. [also appreciate your etfort m impruving Hawaii~s business climate. f am well aware Uiat although we may have substantial consensus among the great leaders of this State as to what needs to be done, it isn't always politically possible to achieve. I dust hope that our legislators have the couraEe to du ~tihat is riKht Cor the people of Hawaii. Tharilc you for your consideration. TiiTiaL F'.0~~ Hawaii Economic Revitalization Task Force ? Package of Proposals ? October 1997 1. Restructure tax system to achieve significant Administrative appeal process with specifictimelimits d.Within existing labor-management relationship, reductions. would be available at relevant level (e.g., governor restructure principallvice principal framework in two a.Major shift to provide benefits to our citizens and and county mayors). areas: revise compensation program to provide pay attract new investment: b. Eliminatethe State Land Use Commission and trans- relating to identified performance measures; and ter certain responsibilities toother State units. provide significantflexibility in assignment of principals Top marginal income tax rate reduced initially from to match school needs with individual skills 10% to 7%; after three years, further reduced to 6%; BLNR responsible for conservation district bound- allother rates reduced proportionately. cries. All other reclassifications and parcel-specific e. Focus school boards, school management, faculty, reviews will become responsibility of the counties. Parents and community on two fundamental issues in Provide nonrefundable tax credit for those with low public schools: create "low tolerance" approach to modified adjusted gross income below $20,000. Development standards regarding State-specific discipline in public schools, and establish programs Reduce pyramiding of the GET (General Excise Tax interests (e.g. educational issues, state highway, etc.) to encourage (strongly) parental participation inday- - taxes on taxes) which is a major issue with smaller onnon-conservation lands will be established by the today education businesses a tax savin of $158 million annual) state; single state agencyldepartment will be ( g y) responsible for matching standards against project f. Continue School-to-Work Opportunities program after Corporate income tax and franchise tax rates cut in plan and providing sign-off, rather than approving or federal funding ends in 1999 through private sector half (saving $40M). Corporate income tax rates drops permitting. funding. from a lop rate of 6.4% to 3.2% (to lowest top mar- c. Prohibit worker's compensation claims related to The School-to-Work program represents a structural ginal rate among states with a corporate income tax). stress from appropriate disciplinary actions. change to the present school organization and GET is raised from 4%to 5.35%. concentrates on preparing students for careers; Exempt exported services from GET to place exported 4. Position University of Hawaii as the preeminent interaction between all school levels and the private services onihesamebasisasexportedgoods.Im- institutionintheworldinkeyareastohelpdrive sectorhasgreatlyimprovediheapplicebilityofschools pose GET on imported services to place it on the same the local economy. to the workplace. basis as imported goods. a. Restructure University of Hawaii into aquasi-public As part of the publiclprivate sector partnership the b.Near-term stimulus of $100 million tax decrease, corporation with independent accountability; state school system would encourage participation in the reaching $200M in 3 years, while preserving core of support to be determined by legislature and execu- program and the private sector would provide fund- essentialand important governmental programs and live branch. ing. services. This will provide additional autonomy to the Univer- 6. Strengthen efficient delivery of governmental sity to set priorities, own and manage lands, funds services. 2. Strengthen the competitive pos(tion of tourism and resources, including legal counsel, and encour- industry. age a stronger entrepreneurial approach. a.Create a GAAP-based (GenerallyAcceptedAccourit- a.Provide increased fundin for tourism romotion at ing Principles) government accounting and budget- 9 P In return, the University will be better able to develop ing system. the $60M (1997 dollars) level and restructure the ac- °world-class" standing in key areas and increase the countability for these funds. proportion of private funding. Provide a clear view of the actual costs of providing Dedicate a fixed ro onion of Transient Accommo- government services by converting the state's P P ° ° b.Establish an advisory Board of Visitors comprising accounting system from a cash to an accrual dations Tax (TAT) revenue raise TAT°(rom 6 /o to 7 /o distinguished individuals from around the world; and accounting system including capital charges for fixed of hotel rentals; dedicate 3 /o of the 7 TAT for tour- expand the horizon of the University and ability to assets to promote efficient use of those assets. ism marketing; broaden TAT base to include timeshare both relate and market to the Asia-Pacific region. condominiums. Change the budget system from an input-based Help position UH as a major institution in the Pacific. system to anoutput-based system with tightly specified * Establish an executive board to oversee tourism mar- c. UH will explore actions up to, and including, the outputs to be purchased and outcomes sought. keting; 7 to 11 private and public sector members; acquisition of the East-West Center and osition it geographic representation to include neighbor islands; P Improve overall efficiency of public sector by provid- no more than 10% of budget used for administration. asthe preeminentAsia-Pacific institution in the world ing more opportunities and flexibility in the delivery of and a cornerstone of l1H's reontation in this broad ser~;ces. Executive board assumes responsibility and is ac- arena. countable for expenditures, contracting out and mea- b. Reduce duplication of government functions. ' surement of fund's impact; all tourism marketing ac- This would be a major asset for the UH and afford A major obstacle to an effective and cost-efficient tivities will fall under purview of the board; non-re- not only survival, but real success for the Center in delivery system of government services is the search tourism functions in DBEDT would be trans- the face ofever-declining federal funding. UH would duplication between the state and counties. It is ferred to the new board; research functions will be acquire necessary physical facilities. essential that duplication be eliminated in areas such the responsibility of DBEDT; board will be responsible 5. Make structural changes to empower individual as: highway and road maintenance; parks; health and for annual report on objectives and pertormance to schools to meet their community, students and ambulance services; human services; housing; and GovernorlLegislature. faculty needs. civil defense. b.lmprove visitor infrastructure and activities. a.Adopt county-based school boards jointly appointed It is the clear recommendation of this group that Waikiki represents 70% of our largest industry. It is by the governor with appropriate confirmation. significant strides be made in this area. Parity among the heart of this industry and has unfortunately, lost counties should be an important objective. To achieve its strop competitive osition due in tar a part to a Funding would remain atihe State level. Fourcounty this, a group of state, county, and private sector g P g school boards with 7 members. re resentatives should anal a this issue, determine lack of investment in infrastructure and attractions. A statewide superintendent appointed and reviewed areas and methods to consolidate, and gain To insure that Waikiki remains competitive with other by the governor would continue. This superintendent agreement on implementation plans. destinations, a joint statelcity analysis group should would appoint each county superintendent with be appointed by the governor and mayor to address concurrence from the county school boards. c. Support cost-efficient government services through the revitalization of Waikiki. This group would con- managed public-private competition. sider: relationship of Waikiki to adjacent areas of Basic academic standards and guidelines would be Improve the overall efficiency of the public sector by Kakaako to Diamond Head; infrastructure to support set at the state level, but how to best achieve those providing additional opportunities and flexibility in the improvement of competitive position; commitment to standards, given the various needs of the local corn- delivery of services. majorAla Wai improvement project; plans for private munities, will be determined at the county level. investment and actions needed to encourage invest- b. Empower individual schools through the strong use Enable state and county governments to implement merit in the near term. of school-based budgeting through a decentralized Public-private competition for government services communit based focus of the count boards, with through a managed process that determines whether Establish a 10-year goal of securing a major league articutaryconsideration for schools with s ecial a particular service can be provided more e~ciently, sports franchise. The effort would be spearheaded p P effectively and economically by a public agency or a by a new privately-funded 501 (c)(3) corporation. This needs. private enterprise. organization would draw heavily from the community. c. Establish two major strategic priorities for the county The managed process shall consider all relevant costs. The attainment of this goal (and even the pursuit) is boards and individual schools: Establish protections for affected State and county important to our position in the Pacific and to our Instill aworld-class focus on the Pacific Rim into the employees, and ensure that civil service laws and merit economy. it would also serve as an important rally- curriculum of all schools; establish goal of second principles are not violated. ing po(nt for our community. language competency for all high school graduates b the ear 2004; utilize non-certified instructors in d. Revise the State procurement code to provide greater y. Make structural improvements in the regulatory Y Y flexibility, while maintaining accountability. process. foreign language. a. Require that ali permits, approvals and licenses have Create aworld-class technology infrastructure and Resolve Hawaiian claims and self-determination a maximum timeframe for review and approval. education focus in all schools; establish computer Issues. For all licenses, permits and approvals, issuing agency literacy for all 8th grade students by 2000; to fund Resolution is vital and requires that native Hawaiians or department (state & county) must establish atime- Program, private sector commits to $10 million to and representatives from labor, business, government provide computer/network technology in schools and the community come together in discussions of frame. The license, permit or approval must be throughout the State. this issue for the betterment of the entire community. , granted or denied within that timeframe (no exten- sions); otherwise approval is automatically granted.