One of the measures that was deservedly vetoed by the governor this past year would have earmarked a portion of the public service company tax collections.
The intent of the proposal was to raise the necessary funds to pay for the construction and maintenance of facilities that would be used exclusively by cruise ships and their passengers. The proposal came forward as an alternative to raising docking fees and wharfage charges for all users of the state harbor facilities.
Those who use the state harbors other than cruise ships include all the ships which bring in the goods residents of Hawaii consume including the tankers which bring in petroleum products which provide the bulk of the energy consumed in Hawaii. A hike in harbor fees would thus affect the cost of everything that is not only consumed in Hawaii, but everything that is produced in Hawaii and shipped outside the state by way of surface shipping.
Thus, the idea of allowing cruise ships to use the tax dollars that they are required to pay the state for the purpose of improving or adding facilities that would be for their exclusive use was much more appealing than an across the board hike in wharfage and docking fees that affect all shippers. As a result, the bill to earmark the public service company tax gained the support of not only neighbor island business groups who see cruise ship passengers as new economic activity, but it also gained the support of other harbor users.
As the bill continued to progress through the legislature, the dowry got more and more generous. In the end, the proposal would have designated millions of dollars of tax revenues based on optimistic forecasts for the purpose of upgrading and constructing new cruise ship passenger facilities.
Obviously the cruise passenger industry was not happy with the demise of the bill. But the proposal did violate some very basic good public finance principles. First, it earmarked revenues that are currently receipts of the general fund. Taking money that could otherwise have been used for a variety of activities or programs sets the program for which the revenues are earmarked above all other programs on the state agenda.
Some might argue that using money paid by a particular type of taxpayer merely allows those revenues to be used for the needs of that particular taxpayer. However, if that were public policy, then the taxes paid by other businesses or professions should only be used to benefit those particular businesses or individuals.
For example, should the general excise tax paid by attorneys be used exclusively to run the judicial system since it is the system that administers the law that attorneys interpret and argue for their clients? Or for that matter, should the general excise tax paid by doctors be used only for health related activities?
Of course not! In either case, there is no direct link between the amount of gross income earned by attorneys or doctors and the impact that their work has on the courts or health care system. Similarly, there is no direct link between the gross income of a cruise passenger vessel and the amount of demand its passengers will have upon a docking facility. A cruise ship will have some passengers paying ten times as much as another passenger for the same itinerary depending on whether or not the cabin is a deluxe suite or a hole in the wall below deck.
While it might make more sense to impose the transient accommodations tax, which is currently 7.25%, as cruise ships provide accommodations that are probably in direct competition with accommodations provided to other visitors to Hawaii, that tax is also based on gross income and is not a good measure of any one passenger’s use of a facility should the tax be earmarked for cruise ship facilities. If there is no intrinsic link between the amount of revenue generated and the need for the facility or program, the amount earmarked may be either too generous or not enough to meet the desired goal or outcome. The result may be that there is not enough money to complete the project satisfactorily or there may be enough to buy gold faucets for all the bathrooms.
The most tried and true method for financing projects which have a broad benefit which in this case is not only the cruise ship company, but also the vendors who benefit from the cruise ship’s visits to their community is the good old fashion appropriation method. Supporters should come to the legislature with a proposal and a firm price tag of what they believe it will cost. Then lawmakers can decide if indeed this is a project that will benefit the community as a whole. And in the end, the taxpayer will be able to discern who is responsible for the expenditure of those tax dollars. This is something we call accountability, something far more obvious and apparent than earmarking.