By Lowell L. Kalapa
Delegates to the 1978 Constitutional Convention believed the most important provision they adopted was the limit on general fund expenditures.
As noted in a previous commentary, the 1978 Convention was convened amidst the national fever to stop the growth in real property taxes. Led by the infamous Proposition 13 movement in California, taxpayers demanded that the rising tax burden imposed by property taxes be controlled.
But limiting how much elected officials could raise from taxes had its drawbacks. The negative side of limiting taxes was brought to the attention of convention delegates. Among the arguments on the downside was the fact that if the revenue raising ability of a government is limited or capped, as Proposition 13 did with property taxes in California, underwriters of public debt are less likely to purchase that debt. Thus, it would be difficult, if not impossible, for any public entity burdened with a limit on their revenue raising ability to issue debt or borrow money.
The other downside to limiting taxes is that in order to keep government running at the same level as it had in the past, public officials had to look for other ways to raise the funds to keep government operating at the same level. And indeed that is what happened in California where they pioneered the creation called the user fee. Suddenly, residents were nickeled and dimed for every public service they used, from garbage collection to the libraries. So while the property tax burden was alleviated, taxpayers in California still ended up shelling out more to pay for public services.
Here in Hawaii, the spending limit proposal took shape similar to one that had been adopted in Tennessee which tied that state’s spending to the growth in the state’s economy. While the Tennessee provision spelled out in detail how the growth in the state’s economy was to be measured, convention delegates elected to leave the definition of that task to the state legislature. The delegates also provided an escape valve should there be some reason why the spending limit needed to be exceeded.
The constitution provides that the limit can be exceeded if the legislature votes by a two-thirds majority to exceed the ceiling provided they declare that the ceiling is to be exceeded and give reasons why the ceiling is being broken. Thus, the spending limit was not so hard and fast that emergencies could not be addressed by exceeding the ceiling.
So has the constitutionally mandated spending limit worked? During its early years, the ceiling did not matter as much because general fund revenues basically drove how much could be spent. And in the early 1980’s there weren’t a lot of revenues. It was not until the latter half of the 1980’s that the spending ceiling started to get in the way of elected officials. As tax receipts grew, the temptation to spend those growing revenues became more difficult to resist.
Elected officials began inventing ways to get their hands on the money. For example, in 1989 the legislature earmarked $90 million of general excise tax receipts which would have normally gone into the general fund and designated those funds to be placed into a special fund for the next seven years. And how could lawmakers resist, after all, the money was to be used to build new educational facilities. The problem was that the expenditures of those funds would never be measured against the state spending ceiling.
The temptation became even greater with all those extra tax dollars that the 1989 and 1990 legislatures deliberately disregarded from the spending ceiling for fiscal years 1990 and 1991, exceeding the ceiling by more than $300 million for each year. With a surplus of nearly three-quarters of a billion dollars, lawmakers felt the urge to spend stronger than the need to give those moneys back to the taxpayer. What is ironic is that the 1990 session was also the session that lawmakers approved giving the counties the power to raise the general excise tax rate by a half-percent to pay for mass transit. Obviously, lawmakers back then didn’t want to share any of their good fortunes with the counties let alone give it back to the taxpayer.
Thus, in that period, the spending limit did not have a significant impact on whether or not lawmakers cared to keep the size of government in line with the growth in the state’s economy. Next week we will look at why the spending limit didn’t do its duty in controlling spending in that period.