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Backfiring of Earmarks and Checkoffs

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By Lowell L. Kalapa

One of the popular gimmicks lawmakers like to entertain to fund favorite projects or programs is to earmark revenues from a particular source with the intent of providing a continual stream of funding without having to go back each year to request funding.
Such is the case of the conveyance tax which was initially established back in 1966 to replace what was then a federal law that required stamps for the transfer of any real property. The “tax” was a nominal nickel for every $100 of value transferred because it was never intended to raise money to run government but was a means by which information was collected as to the value being transferred. This information was to help real property tax assessors in their annual task to value real property for tax purposes.
However, in 1993 some lawmakers seized upon the tax as a way to fund programs that they rationalized as being related to the sale or transfer of real property. So the legislature doubled the tax rate to ten cents per $100 of value transferred and earmarked the increased revenues equally for the natural area reserve fund and the affordable rental housing fund. While the objects for which these funds are earmarked seemed to be a stretch, lawmakers were successful in getting the measure approved because property sales and valuations had been soaring in the late 1980’s and early 1990’s. So the conveyance tax was a tantalizing target.
But then the market collapsed and suddenly those same lawmakers were back to try and raise the rate because the funding was insufficient for the targeted programs. Luckily sanity prevailed in the face of a declining market and those efforts were resisted.
However, with a hot real estate market on all islands, lawmakers are again revisiting the possibility of raising the rate and earmarking either the increased amount or all of the collections. The problem is that the conveyance tax is highly dependent on the activity of the market. While the real estate market reached its apogee in the early 1990’s, the decade-long recession sunk the market just as fast. People ended up holding mortgages that were greater than the assessed value of the property.
More importantly, one has to ask what is the relationship of the conveyance tax to maintain the state’s natural areas, like conservation lands and state parks or for that matter provide affordable rental housing? Unlike the user taxes that measure the amount of use and wear and tear made on public facilities like the vehicle related taxes, there is little, if any, relationship between the conveyance tax and these programs.
Other proposals to raise the conveyance tax rate would impose higher rates on more valuable transfers. In other words, with perhaps the thought that it wouldn’t be politically correct to wack the first time homeowner, a higher rate on those million dollar estates would sure rake in the bucks.
Unfortunately, what these astute lawmakers don’t seem to remember is that nonresidential property is also subject to the conveyance tax when the title is transferred whether in fee simple or by lease. And while some may think that’s all right because businesses can just pass the cost of the increased tax on to their customers, guess who those customers are! You and I will end up paying for the increased tax in higher prices.
Similarly, lawmakers like to adopt check-offs – that’s where the taxpayer who has a refund coming to him or her can designate a couple of dollars for some worthy cause. Recent additions to the list of check-off boxes on your state income tax return include money for school repairs and another one for libraries. This year there are proposals to add check-off boxes for child abuse programs and beach restoration.
While advocates of the various worthy causes see it as a way to get their hands on more money, lawmakers viewed such check-offs as a way to satisfy some constituency group. What it really means is that the lawmaker no longer has to pay attention to the issue because the program has a dedicated source of funding. If advocates complain that they need more money appropriated, lawmakers can conveniently point to the check-off and tell constituents that they have dealt with the problem.
If lawmakers truly think that earmarking various tax resources or allowing taxpayers to designate their tax refunds for various programs will absolve them from having to make difficult funding decisions, then perhaps all the revenue resources should be earmarked for this or that program and then we could do away with the legislature as there would no longer be a need for lawmakers to make funding and program decisions.

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