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Turning the Tables on Taxpayers

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By Lowell L. Kalapa

The spotlight for the taxpayer turns now from the state legislature where the lights have been turned out to the local county councils.
It is that season again when local officials hammer away at spending plans for the coming fiscal year that will in turn affect how much in property taxes will be needed to fund those spending plans. Every year elected officials like to banter about like a bunch of well preened fighting cocks that they will be doing more for the public in services but they will also be able to do it without raising real property taxes.
It always seems like a miracle that somehow county officials can whip up more services without raising the real property tax rate. Well, that isn’t much a mystery when property values increase. If the base increases and the rate is not increased, your bill will still be larger than last year’s bill. On the other hand, if values decrease, elected officials have to do a mad scramble to find the necessary revenues.
In the past the strategy that seemed to work was to impose higher real property tax rates on properties which didn’t represent a lot of voters. In this case it was all the nonresidential properties or business parcels like commercial, industrial and agricultural property. Elected officials argued that these property owners could recoup the cost of the property tax because they could “pass it on” to their customers. That worked for a while until voters realized that they were the “customers” to whom the cost was passed. This strategy also lost its appeal as the state’s economy began to fail and many went out of business.
Another strategy was to find sources of revenues other than the real property tax. In this case, user fees became a very attractive target. After all, argued officials, people who use specific services of the county should pay for them. Well, that made sense until so many county services were funded through special user fees that people lost sight of just who was paying for what. Elected officials also realized that when certain services were financed out of user fees that were deposited to a special fund, they could not get their hands on those receipts as they could be used for only the designated purposes.
In Honolulu, the City administration has found a new strategy to create more resources. In this case it is a matter of refinancing the City’s bonded debt so that debt service payments can be lowered. In fact, the amount requested for debt service for the next fiscal year will drop by just over 15% from last year. Miracles of miracles, sounds like a marvelous idea!
Just how do they do this? Well, lower interest rates help somewhat, but what has been done is that the debt service payments have been stretched out over more years. It’s like selecting a 30-year mortgage instead of a 20-year mortgage. Naturally, with more payments to be made, the amount of the payments can be smaller. With smaller amounts and a variable amount of principal to be repaid, the amount required on a current basis will be smaller.
This financial engineering reduces the fiscal pressure on current policy makers by making available funds for other programs which would have been allocated to debt service. The savings generated by these devices are one-time only. Stretching out debt payments over a longer term or tiering principal payments merely shifts the burden of debt repayment into future years. Issuing debt which requires lower principal payments initially and which increases over time is predicated on the time value of money and on the assumption that inflation will erode the nominal value of the debt.
Should the City & County of Honolulu’s ability to pay not increase as fast as the rate of increase in scheduled principal payments, subsequent generations of policy makers and taxpayers will be forced to make the difficult choices of reducing services and projects or raising taxes.
Another caveat is that these one-time windfalls may be used to expand government programs. In subsequent years, future policy makers will have to finance these programs from the current revenue base. An analogous situation would be in 1993 and 1994 when the state administration used the release of tax revenues accumulated in escrow accounts as a result of tax litigation to postpone making difficult spending and revenue choices.
Nifty strategy, but in the long run, future policy makers are going to have to deal with the problem.

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