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Judging the Health of the State by Its Bank Account

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By Lowell L. Kalapa

For the first time in nearly five years, the state will be ending a two-year run with a surplus in the treasury of more than 5% of the revenues collected over the past year.

Why crow over a two-year running surplus? It is because the constitution provides that whenever the state runs a surplus equal to 5% or more of the revenues collected for that year in the general fund for two consecutive years, an automatic refund mechanism is triggered. Based on preliminary figures, it appears that the trigger is about to go off as a result of the surplus left at the end of fiscal year 2000 which just ended on June 30th.

If indeed that is the case, then the 2001 session of the state legislature will have to provide for a mandatory tax refund. Many taxpayers got a bit tired of hearing about this tax refund as lawmakers more often than not gave back only a dollar to satisfy the requirement. In fact, some state officials wanted to repeal the requirement and replace it with a rainy day fund.

Certainly, it didn’t make a lot of sense for lawmakers to merely refund a dollar just to satisfy the constitutional mandate. After all it was just a dollar. However, if one were to examine the history and understand the thinking of the 1978 constitutional convention which inserted the provision into the constitution, it would make much more sense. The ‘78 convention was held at a time when Proposition 13 was sweeping the California landscape with citizens irate at soaring property taxes. The answer in California was to slap a freeze on the amount of property taxes that could be raised by limiting the growth in property tax bills to one percent per year.

Cooler heads prevailed in Hawaii when they realized that limiting the amount of revenues government could raise from taxes engendered a host of other problems like the issuance of debt. Instead, convention delegates went in the direction of limiting spending, tying the growth in general fund expenditures to the growth in the state’s economy, reasoning that government should be allowed to grow only as fast as the economy which has to support that government.

While convention delegates put a cap on spending, they were wary that if a cap was placed on spending and the tax system continued to produce more than was necessary to fund that level of spending, then taxpayers should know about it.

The result is the mandatory tax refund provision. Even if the amount is only a dollar, the fact that lawmakers have to provide that refund is an indication that more than enough money is being generated by the tax system for the general fund than is required to keep the doors of state government open.

Now some bureaucrats might argue that government has tightened its belt to keep spending below the level of tax revenues. And while that might be true, especially in the past few years, it is also true that state policy makers have shifted a number of programs that used to be funded out of the state general fund into special fund financed schemes. For example, the natural area reserve program or trails program of the department of land and natural resources is now financed out of an earmarked portion of the conveyance tax which otherwise would have been a receipt of the general fund.

Similarly, the business registration division of the department of commerce and consumer affairs is now entirely funded with special funds generated by business registration fees that used to go into the general fund. There is also evidence that the registration fees are generating more than is needed to run that division and will now go to pay for other programs of the department.

With financing schemes like this, the point should be even more pronounced, that the state tax system is producing more than is needed to operate state government. Having the mandatory tax refund provision in the constitution throws a spotlight on this fact and makes the taxpaying public aware that they are having to pay more than is necessary to run government.

In the weeks ahead, we will look at some of the other constitutional provisions that make us aware of how well elected officials are using our tax dollars.

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