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The Honolulu Advertiser
Posted on: Wednesday, February 17, 2010

Delaying payments could easily backfire

By David Shapiro

Gov. Linda Lingle last year admonished legislators not to address the state's budget crisis by "kicking the can down the road."

But it's difficult to argue with House Finance Chairman Marcus Oshiro that this is exactly what she's doing with her plan to deal with much of the current $1.2 billion state deficit by deferring 2010 obligations until fiscal 2011.

The administration will delay paying $275 million in state income tax refunds until after July 1 and has warned health providers that they may not get $300 million in Quest reimbursements until the new fiscal year.

The delay in paying bills is one reason Moody's Investors Service has issued a negative bond outlook on Hawai'i, and the deferral strategy threatens to dig us into an even deeper hole next year after Lingle leaves office if the economy doesn't dramatically improve.

The governor can mostly defer bills by executive order and after much hand-wringing lawmakers will likely go along for lack of other palatable options.

State departments have already had their budgets cut by 14 percent or more, with little room left for significantly greater savings. Every nickel in the budget has a constituency, and there's a legislator squawking to restore virtually every cut.

Public employee pay cuts and layoffs have produced most of the budget drama, but only a few hundred million in savings have barely made a dent in the deficit, leaving little political will to push the matter further.

There's about $250 million in the hurricane relief and the rainy-day funds, but depleting the reserves adds to the nervousness of the bond market and could increase our cost of borrowing for capital improvements.

With tax increases, there's incendiary politics and little room to maneuver.

Legislators last year raised the top income tax bracket to 11 percent, highest in the nation, so the always-popular tactic of balancing the budget by soaking the rich already has been tapped.

Public worker unions argue that the 4-plus percent general excise tax is low compared to sales taxes in other states, but a sales tax is levied only once at the point of sale. Our excise tax is imposed whenever goods change hands from manufacture to market.

The Tax Foundation of Hawai'i says our G.E.T. equates to a sales tax of at least 11 percent, among the highest in the nation.

The Senate figured last year that its failed effort to increase the excise tax by 1 percentage point would have raised about $200 million after all the politically necessary exemptions were factored in. Increasing the G.E.T. enough to cover the bulk of the current deficit could crush the economy.

There have been few ideas for generating new economic activity beyond casino gambling, which is an economic mirage and a political non-starter.

So we're left to kick the can down the road and pray that the economy heals before the bills come due on the deferred payments not a good bet in an environment where revenues consistently have been lower than expectations.

The real shame is that a year and a half into the Great Recession, Hawai'i is still stumbling and bumbling along with no strategic plan to lead us out of the current difficulties and rebuild our economy and state government for the future.

The Lingle administration and legislators aren't even going through the motions of working together anymore. Last year's Legislature was described as one of the most politicized and least productive ever, and this year is shaping up as more of the same.

Great societies are built on pulling together when times are tough. Hawai'i is scraping bottom because we have too many excuses for allowing adversity to blow us apart.