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Even Tax Credits Are Expenditures Of General Funds

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By Lowell L. Kalapa

(Released on 6/15/08)

Under the state constitution, all expenditures of public funds must go through the appropriation process, that is, the legislature must vote on all expenditures of public funds.

The constitution also provides that spending from the general fund cannot exceed the state’s current general fund revenues and unencumbered cash balances unless the governor declares that public health and safety are threatened, as defined by law. The constitution further limits the growth in general fund expenditures to the rate of growth in the state’s economy, as defined by law.

That growth has been determined to be the growth in the state’s total personal income. This particular provision is not as stringent as it allows the spending limit to be exceeded as long as the governor or the legislature declares by how much the ceiling is being exceeded and the percentage that excess represents.

On the other side, the amount of debt the state can issue for capital improvements is limited by how much in debt service can be assumed by taxpayers by limiting how much of the state’s general fund revenues can be used to pay back that debt.

All of these financial safeguards in the state constitution are there to insure that the taxpayers of Hawaii are not put in jeopardy by preventing any branch of government from spending more than what the state takes in general fund revenues and accumulating no more debt than what those revenues can afford. This insures that state taxpayers are not faced with bankruptcy as some cities on the mainland are.

However, that is not to say that taxpayers can rest easy knowing that these constitutional barriers are in place to protect their pocketbook. That’s because since the constitution was last amended in 1978, legislative interpretation has effectively circumvented the intended safeguards. As reported in an earlier commentary, the way exceeding the limit is declared makes a mockery of what the declaration was intended to do, which is to raise a red flag that spending has grown faster than the economy.

It was also pointed out in an earlier commentary that the size of government has been able to grow outside the confines of the general fund by the creation of special funds financed with user fees and charges. The result is that state government today is larger than what the 1978 constitutional convention delegates envisioned, placing a heavier burden on taxpayers and the economy.

Add to that some of the back door spending that lawmakers have undertaken in recent years by the enactment of tax credits for various activities. And why? Because tax credits amount to nothing more than the expenditure of general fund tax dollars that would have otherwise helped to pay for the programs of state government. What is even worse is that neither lawmakers nor taxpayers know exactly how much is being spent since the tax credits are there for the taking, usually without limitation in either number of claims that can be made or the size or amount of the credit.

As a result, lawmakers and tax officials have to estimate (guess) how much will be claimed and make allowances for the impact or the foregone revenues that would have otherwise gone to the state treasury to pay for state programs. Thus, where an appropriation is clearly defined as to how much is being spent, the pernicious tax credit is an unknown creature.

Given that this creature known as the tax credit can have unknown consequences for the fiscal health of the state, consideration might be given to defining the adoption of tax credits as a general fund expenditure and subject the adoption of such credits to the same safeguards as appropriations from the general funds. Doing so would allow both lawmakers and taxpayers a view of the big picture of just how much is be expended in state resources both on state programs as well as on tax credits.

Advocates of tax credits may argue that there is no revenue impact unless the specific activity is undertaken which makes the taxpayer eligible for the credit. The problem with that is lawmakers and administrators have no control or even knowledge of whether the credit will be claimed and until it is, the mere fact that the potential for claiming the credit exists creates an unfunded liability for the state general fund. These unknowns create uncertainty and the potential for insufficient revenues to fund state government.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui NewsWest Hawaii TodayGarden Isle News, and the HawaiiReporter.com.

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