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Imperative That All “Spending” Be Reviewed

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By Lowell L. Kalapa

(Released on 10/12/08)

Now that the other shoe has dropped and the reality of the soured economy is beginning to set in, lawmakers and administration officials will have to sharpen their pencils to figure out just what needs to go as far as state spending.

Although each can argue just how much has to be cut, be it the $900 million that has been forecasted by the state administration or some number in between, there is no doubt that state spending will need to be reined in because it doesn’t make sense to add new taxes when the victim is down and out. Just what sort of reductions will be made in state spending will be left to lawmakers and administration officials who will now be forced to do what they really dislike doing, that is, to set priorities. Of course, no one wants to be the bad guy and unlike the last time around when the economy turned south there are no special funds from which lawmakers can raid excess funds.

We have already seen what happens when cuts in state spending are proposed as the Board of Education recently attempted to make reductions in spending by eliminating certain programs like junior varsity sports and support of the Special Olympics for the disabled. These proposals were met with such vocal dissent that they were ultimately withdrawn.

So how will lawmakers make reductions in spending so that the state doesn’t overflow with red ink? It would be prudent for lawmakers and administration officials to get together on establishing criteria by which each program or service needs to be measured and evaluated. While health and safety issues would probably head the list, other areas of need should also be priorities such as education and social services.

By establishing a common measure of what should be priorities for state spending, each program can be evaluated based on that criteria. Should a particular program not meet the criteria, then a reduction or elimination of that program or service could be justified based on the criteria adopted by both the administration and policymakers. This would eliminate the constant bickering over which program or service gets saved from the budget axe.

While the logical fix is to cut spending, lawmakers and administration officials must also look at the back door expenditures called tax credits and tax incentives. These “expenditures” are no different than appropriations for public programs and services. These are tax dollars that are foregone as a result of a taxpayer being able to reduce his or her tax bill because of the tax incentive. Proponents will argue that these tax credits or tax incentives generate a public good, but that public good needs to be measured against all other needs of the community at large.

However, one has to ask if these expenditures would stand against the elimination of the junior varsity program in the high schools, or the shrinking of services to pregnant teens or youth who are at risk. Proponents would argue that these tax “expenditures” are just as important as spending on public programs because they are creating jobs and attracting new industries to Hawaii. That might be a valid argument except that: (1) no other businesses have the privilege of a tax incentive; and (2) it is all other taxpayers who are being asked to pick up the tab so that state government can provide the services we all need.

On a relative basis, the cost alone of the high technology tax credits tops $100 million this year, dwarfing the cuts the department of education will have to make which currently total more than $70 million. The irony is that the cuts in education mean that the department will not have all the tools it needs to prepare the next generation to fill the jobs those high technology companies are supposed to create.

So while lawmakers and administration officials struggle with ways to reduce expenditures, they might just want to take a look over the fence at the other side of the ledger and weigh the cost of the credits versus the cost of cutting a public service or public program. More importantly, lawmakers need to realize that estimating the cost of the tax credit is difficult at best where there are no aggregate credit limits.

The bottom line is that the difficult task of prioritizing our budget should consider all expenditures and credits for a fair and equitable evaluation.

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

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