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Insidious Earmarking is Poor Tax Policy

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By Lowell L. Kalapa

Last week we looked at how the conveyance tax has been tapped to fund programs such as affordable rental housing and conservation projects under the natural area reserve program.
It was pointed out that the conveyance tax was the least stable of all the taxes imposed by the state as the collections of the tax rise and fall with the fortunes or misfortunes of the real estate market. When the increase was adopted in the early 1990’s the so-called Japanese bubble was just about to burst, having reached an all-time high. Naturally advocates for the earmarking savored the opportunity to tie their aspirations to the rising real estate market. However, as we all remember, once the market crashed there was relatively little activity in the market and many of the once overpriced homes sank below the debt used to acquire those properties.
Nonetheless, advocates at the time argued that there was a direct link between the sales of real property and demand for affordable rental housing and the need to fund conservation programs. That argument appears to be a long stretch of the imagination as one has to ask what does the price of real estate, or for that matter the number of properties sold in any given period, have to do with either affordable rentals or natural areas of our state?
And that is the problem with earmarking resources that have absolutely no relationship between the person paying the tax and the services or benefits paid for by the tax or fee. Just this past session lawmakers approved a hike in the motor vehicle registration fee to fund emergency air ambulance services. No doubt the logic might have been reasoned that because drivers get into accidents that may require emergency ambulance services, there is a direct link between drivers of vehicles and the need for that service. Of course, no one seemed to acknowledge that swimmers may be drowning victims or that stranded hikers or hang gliders that catch an errant wind might need emergency ambulance services.
Where there is a lack of a direct relationship between the source to raise the funds and the programs proposed to be funded by earmarking those resources, the prospects are that there will be a mismatch of resources to the demand for the service. In the example of the conveyance tax, just because properties are sold or transferred does not have any link to the demand for affordable rental housing. If, in fact, an inexpensive piece of unimproved land is transferred for the purpose of building affordable rentals, does the conveyance tax on that transfer help make those units affordable or does the increased conveyance tax rate merely exacerbate the final cost only to be recovered from the rents charged for those units.
Generally, the most appropriate earmarked resources fall within the area of transportation as there is a more direct relationship between the use of transportation facilities and those who end up paying the earmarked taxes, well, almost. For example, the fuel and motor vehicle weight tax, as well as the motor vehicle registration fee imposed by both the state and counties, are earmarked for road construction and maintenance.
The fuel tax is a measure of how much or how far the highway user drives and therefore how much of the road is used by that particular vehicle. The weight tax, on the other hand, based on the number of pounds your vehicle weighs measures the kind of wear and tear the vehicle puts on the black top. And finally the registration fee might be considered an admission which is paid to allow your vehicle onto the state or county roadway.
Similarly, the airports are financed with fuel taxes on the fuel purchased by airlines in Hawaii and by landing fees which measure the number of times an airplane takes off and lands at a Hawaii airport. Because airports are a part of a statewide system, revenues generated at Honolulu Airport during the first years of statehood helped to finance improvements on the Neighbor Islands which in those days welcomed only inter- island flights. Thus, the Neighbor Islands now have the capability to receive international flights because the necessary infrastructure is in place.
The same can be said of the state’s harbors which are financed largely from wharfage and docking fees, that is the rental of the state docks in its harbors where ships can tie up and unload their cargo. Depending on the size of the ship, the amount of the wharfage fee will vary. Again the usage determines the amount that will be paid and therefore there is a direct relationship between the user and the amount of usage of the state facility.
Next week we will examine where some of these use/user relationships are being questioned.

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