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The Honolulu Advertiser
Updated at 5:50 p.m., Friday, March 27, 2009

State budget deficit: Tax hikes would strain a weak economy

When so much of the budgetary landscape lies in a thick fog, it's hard to map out the best road ahead with real confidence. Can this state meet its constitutional mandate to balance the budget in these hard times, without raising taxes?

It's impossible to say for sure. But this much is certain: Going that way runs right through a swampy bog, a route that should be avoided at all costs.

Lawmakers, in their effort to find a workable budgetary plan, are contemplating various ways of boosting state revenue, which has tanked along with the declining tourist traffic and recessionary business closures.

Setting aside momentarily the difficulty of cutting costs — when the social needs of education, health and safety are so great — it's a simple fact that raising taxes in a struggling economy does damage. This economy is weighed down by enough damage as it is.

Raising taxes during a recession adds expense to a business' bottom line, prompts some in an already weak condition to close their doors and discourages others from hiring.

This is true whether it's a hike in the general excise tax — which has the added demerit of disproportionately hurting the poor — or an income-tax increase on the upper income. Owners of many small businesses report company profits as personal income, so carving out more taxes there will weigh down those who might otherwise help kick-start the recovery.

This same concern is playing out in states across the nation, almost all of them in a budgetary crisis, some more severe than Hawai'i's.

Gov. Linda Lingle has presented a budget plan that, if it works, would avoid tax hikes. But that's a big "if." Lingle's plan hinges to a large extent on the use of federal stimulus "stabilization" funds for closing gaps in the state budget. Her application for the funds will have to pass federal muster — she's proposing diverting money pegged for education to other needs.

There appears to be room for some flexibility in the federal stimulus legislation, but it's not clear how much. A plan by South Carolina's Gov. Mark Sanford to use the money to pay down that state's debt has run into a brick wall at the Obama administration's Office of Management and Budget. Lingle had better get assurances that her plan does enough to "advance essential education reform," as required, so that Hawai'i secures its share of stimulus funding.

If the worst-case scenario is realized and more revenue must be raised, state leaders must minimize the harm it does to economic recovery. Any tax increases must be enacted only as a last resort and with an end date — just enough to patch the state through the immediate crisis.

At a time when so many are losing jobs and tightening their household budgets, it would be a disgrace for government to respond by hitting them when they're down. Taxpayers are counting on their elected leaders to cut nonessential spending to the bone before hitting up the public for its own "bailout."