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Undermining Integrity Of Public Finance

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By Lowell L. Kalapa
(Released on 09/16/07)

Last week we learned about how the predicament now faced by the highway fund can be traced back to the fact that lawmakers raided the fund paid for by highway users to fund all sorts of programs from education to social services to public safety because there weren’t enough general fund revenues.

The raid of the highway fund is not the only example of how lawmakers have violated the integrity of good public finance principles in Hawaii, as there are numerous other ways lawmakers have found to bend the rules of the game. It is ironic that while lawmakers are currently taking aim at the Bureau of Conveyances and the possible conflict of interest title companies may have violated, that whole issue is one for which lawmakers need to take some of the blame.

Lawmakers, in their rush to point the finger of blame, fail to recognize that they contributed to this situation in the first place by neglecting to properly modernize the Bureau of Conveyances. In fact, instead of taking funds from the tax revenues raised by way of the conveyance tax, they instead raised the conveyance tax rates and earmarked the proceeds for everything but the Bureau of Conveyances. Beginning in the early 1990’s lawmakers decided that the conveyance tax had a reasonable relationship or nexus to housing, being levied on transactions that involved real estate transactions. Also, because it involved real estate transactions, they figured that care of the natural areas of the state was also a reasonable nexus.

As a result, they started carving up the proceeds of an increased conveyance tax rate for the purposes of funding affordable rental housing and the natural area reserves program. Little did they consider that perhaps they should have used some of the conveyance tax collections to help upgrade the Bureau of Conveyances. However, by the time someone in the legislature realized that the Bureau was so antiquated, lawmakers had pretty much tied up the receipts of the conveyance tax so they decided to levy a brand new fee on everyone who utilized the services of the Bureau.

How antiquated was the Bureau? By the time the legislature got around to adopting a schedule of fees to fund the modernization of the Bureau, it was reported that the Bureau was utilizing Unisys and Wang equipment. This was in 1999 long after most operations had discarded Wang computers. The Bureau had no local area network so the two different systems could not communicate with each other. Imagine the frustration the “customers” of the Bureau encountered as they tried to record the transactions of real estate. There was such a backlog that in many cases recordation of documents took more than a year.

It is clearly understandable how this frustration would drive the customers of the Bureau’s services to the point where they would do anything to modernize the Bureau and increase its efficiency. So now lawmakers are looking into the propriety of title companies donating software and equipment to the Bureau, supposedly in return for privileged access to the Bureau’s information system. What lawmakers will find is anybody’s guess, but the public should also raise questions about how inaction by lawmakers created a situation where the private sector may have felt compelled to do something when lawmakers had failed to carry out their duties in insuring that public services were being delivered in a timely and efficient manner.

One certainly has to wonder if lawmakers had not used the conveyance tax for issues like affordable rental housing and the natural area reserve program and had instead reinvested a portion of the funds from the conveyance tax that: (1) no additional fees would have been needed, and (2) the title companies would not have purchased software and equipment for the Bureau.

Readers should also be aware of the fact that the conveyance tax, when it was first enacted, was never meant to be a source of revenue for the state, but, in fact, the nickel per hundred dollars of value transacted was merely a way to aid property assessors in keeping track of changing valuations of real property. Whatever was realized from the conveyance tax went into the general fund, none of it was earmarked as it is today.

So in large part, lawmakers need to point the finger of blame at themselves, not only for the possible inappropriateness of the title companies making questionable contributions in return for access, but also for earmarking what was originally a general fund receipt and then substantially increasing the rate of the tax so favored programs could be adequately funded.

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