Lawmakers are required by law to pass a balanced budget for the upcoming biennium. Faced with a $262 million deficit, which is expected to worsen when the Council on Revenues announces new projections in May, we have proposed a combination of strategies. Included in the mix is a proposal to raise income taxes on higher-income wage earners. While no one wants to raise taxes, we explored the impact of this type of tax increase and discovered it has clear advantages. Here's why: Personal income tax increases are a better option than spending cuts because they have a lesser impact on consumer activity in our local economy. The 2001 Nobel Prize-winning economist Joseph Stiglitz believes "economic theory and evidence gives a clear and unambiguous answer: It is economically preferable to raise taxes on those with high income than to cut state expenditures."

According to economist Peter Orszag, President Obama's choice for budget director, when it comes to addressing state fiscal deficits in the short run, tax increases on higher-income families are the least damaging mechanism of all. Orszag's argument was supported by 120 economists who signed a letter to Gov. David Paterson of New York, a state also dealing with a significant deficit.

"The reasoning is straightforward: In a recession, you want to raise (or not decrease) the level of total spending — by households, business and government — in the economy," the letter states. "Budget cuts reduce the level of total spending. Raising taxes on high-income households also will reduce spending, but by much less than the amount of the tax increase since those with plenty of income typically spend only a fraction of their income."

Personal income-tax increases are also a better option than spending cuts because they support, not undermine, federal attempts to stimulate the economy. History and basic economic principles show that whenever you attempt to close a budget deficit, the economy contracts. If we close the budget gap by preserving as much spending as possible, this will have a more positive impact on the effectiveness of the federal stimulus package.

Some may recall the increase in federal taxes on upper-income Americans in 1993 as part of the effort to address a federal deficit. There is no evidence that these tax increases harmed the national economy; in fact, the U.S. enjoyed a boom economy in the decade following.

In addition, fears that high-income families will leave the state are considered overblown. Frank Mauro, executive director of the Fiscal Policy Institute, points to evidence that high-income families are able to absorb increases, and cites a recent Princeton study that concluded that no out-migration resulted from the state of New Jersey raising income taxes on households with incomes over $500,000.

Hawai'i faces more than a short-term budget deficit. I am optimistic that we will pull out of it successfully, but we must look beyond our immediate situation. It is obviously the opportune time to modernize our tax structure to ensure that we have the adequate revenue we need. Many states face the same problem — tax codes that may be obsolete, relying on industries that no longer generate the revenue and economic stability that we desire.

The Center on Budget and Policy Priorities estimates that at least 45 states are facing deficits of such magnitude that it is clear they can't "cut" themselves out of the hole. Ten states are seriously considering raising taxes: Arizona, Connecticut, Delaware, Illinois, Massachusetts, Minnesota, New Jersey, Oregon, Washington and Wisconsin. Both California and New York raised income taxes this year.

Raising taxes must also be part of the solution, and raising the personal income tax on the wealthiest of our society seems to be the best option overall.

As we consider all the options available to use, it's important for Hawai'i residents to keep an open mind. Taxes are not inherently evil. A tax system allows government to plan for and provide the infrastructure and the services needed for our society to function. That tax system, however, should not only be fair and efficient, but structured in a way that promotes healthy economic growth.

Rep. Marcus Oshiro, D-39th (Wahiawa) is chairman of the House Committee on Finance. He wrote this commentary for The Advertiser.

Reach Marcus Oshiro at (Unknown address).