Tax Cut Shell Game

I’ve used the saying “there’s no free lunch” repeatedly over the years in this newsletter.  You don’t hear it used much any longer, and I sometimes wonder if I’m turning into my grandfather.  The saying is a valuable lesson that most people were never taught.  It goes hand-in-hand with “if it sounds too good to be true, it probably isn’t true.”  If more consumers kept these two thoughts in their minds, we’d see a drastic reduction in fraudsters taking advantage of people.

 

What does “there’s no free lunch” mean?  I’m not sure why lunch was the focus of this old saying, because in life, nothing is free.  If someone offers you something, always be mindful that from their end, they want something from you!

 

It was with this in mind that I had great skepticism at the huge announcement at the end of the legislative session in May.  It was heralded far and wide, that for the first time I can recall, our elected officials approved a huge tax cut.  I was skeptical because the concept just didn’t make sense.  Hawaii is still financially recovering from the pandemic.  Tax receipts are down, and the Maui wildfire has and will cost taxpayers a boatload of cash.  We have crumbling infrastructure, outdated and poorly supplied schools, and a train that will need probably another billion or more to get it start and end at the proper places.

 

Where is all the money going to come from?

 

 

Hawaii’s tax system is set up rather uniquely.  The state government acts like “the master” by collecting almost all the tax revenues levied.  The state gets all the General Excise Tax (GET) revenue, the Transient Accommodation Tax (TAT), plus numerous other targeted taxes.  The only revenues the counties are allowed to collect are property taxes.  Each year the 4 counties travel to the legislature and beg for the yearly allotment of the general funds collected by the state in order to fund the county government operations.  The governor and the legislature love this arrangement because the state maintains control of the vast taxes collected and gives out what “they” feel the countries should receive.  The system is archaic and inefficient.

 

The system is so wonky, here’s a great example of how “smart people” can set up a system that’s really dumb and inefficient.  Did you ever get a ticket from a police officer?  That officer works for the county the ticket was issued in.  That officer’s salary is paid by the county.  Where do the monies collected from traffic fines go to?  The state!

 

 

The Big Con

 

How will the state government increase spending while cutting the amount of tax revenue they collect?  Many legislators have signaled a desire to shift the tax burden to the counties.  The plan is simple, and the state leaders won’t look like the bad guys when implemented.

 

The state will reduce and possibly eliminate the funding they “give” to the counties each year.  Without the infusion from the state, counties will be forced to increase revenues with the only means they have – property taxes.  When your property tax bill goes up, the governor and the legislature can wipe their hands and say it’s your county’s mayor and county council that are the bad guys.

 

Yes, Hawaii’s convoluted tax system is dumb.  Yes, it doesn’t make sense why taxes are collected by the state for some things, and the counties for others.  But the bottom line is how much taxes are we paying in total?  That’s called the total tax burden.  How does Hawaii rank?  If you guessed awful, you’re right!  The statistics below come from Wallethub.  Hawaii ranks #2 for the highest tax burden in the country.  We’re worse than California, Illinois, and even New Jersey!

 

 

 

Good job Hawaii State Legislature!  You fooled us with your unprecedented tax cut.  But we are now keen on your shell game.  If you give with one hand, but then take from the other, you haven’t given us anything.  Once again, it goes to show – there’s no free lunch.

 

 

 

 

And now the week’s economic news…….

 

Stubborn Inflation

Investors were focused on the inflation data this week.  The latest results were essentially in line with expectations, but mortgage rates moved higher.

 

The Consumer Price Index (CPI) is one of the most closely watched inflation indicators released each month.  To reduce short-term volatility and get a better sense of the underlying inflation trend, investors look at core CPI, which excludes food and energy.  In November, Core CPI was 3.3% higher than a year ago, matching the consensus forecast and the same annual rate of increase as last month.

 

Although this annual rate is down significantly from a peak of 6.6% in September 2022, and from 3.9% in January of this year, it is still far above the readings around 2.0% seen early in 2021, which is the stated target level of the Fed.  Shelter (housing) costs continue to be a primary reason why inflation remains stubbornly elevated.  Other categories which posted large monthly increases included new and used car prices, but this was likely due to high demand for vehicles to replace those damaged by hurricanes.

 

Another significant inflation indicator released this week which measures costs for producers also was essentially in line with the consensus forecast.  The core Producer Price Index (PPI) was 3.4% higher than a year ago, up from an annual rate of 3.1% last month and the highest level since February 2023.  Of the two major inflation reports, investors tend to place less weight on PPI, since it reflects a smaller slice of the economy than CPI.

 

On Thursday, the European Central Bank (ECB) reduced benchmark interest rates by another 25 basis points to 3.00%, as expected, marking its fourth cut this year.  The statement released after the meeting again emphasized that future monetary policy decisions will be based on incoming economic data, while providing no specific guidance.  According to the statement, the battle against inflation is "well on track" and officials expect to reach their target level next year.  Investors anticipate that there will be several more 25 basis point rate cuts by the ECB next year.

 

 

 

 

Next Week

The next Fed meeting will take place on Wednesday.  Investors anticipate a 25 basis point reduction in the federal funds rate and will look for additional guidance on future monetary policy.  For economic reports, Retail Sales will come out on Tuesday.  Since consumer spending accounts for over two-thirds of U.S. economic activity, the retail sales data is a key measure of the health of the economy.  Housing Starts will be released on Wednesday and Existing Home Sales on Thursday.  Personal Income and the PCE price index, the inflation indicator favored by the Fed, will come out on Friday.

 

 

 

Until next week…….