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Not Learning From Mistakes Could Prove Costly

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By Lowell L. Kalapa
(Released on 3/22/09)

After years of trying to make people contort themselves so that they could gain some sort of windfall from the state’s tax system or in some way insure that the programs of choice had dedicated streams of resources, lawmakers are now learning how such antics can muck up their ability to respond to the downturns in the economy.

As lawmakers head into the second half of the session where they review the work done by the opposite house, it is clear that one of the ways they will attempt to balance the state’s general fund budget is to siphon funds from special funds that were created by earmarking the receipts of various sources of taxes that were once general fund revenues. Take, for example, the conveyance tax that was established at a mere nickel per hundred dollars of value of real property when transferred from one owner to another. It was created so that the real property assessor had some idea of how much a certain property was worth which then could be used to set valuations for real property tax purposes. This tax was never meant to be a source of revenue to fund government operations.

As general fund tax collections began to decline in the early 1990’s, lawmakers decided that there was a relationship between this tax on transfers of real property and affordable housing and the preservation of the state’s parks and hiking trails. They doubled the tax rate to ten cents and earmarked the revenues from the increased rate for the affordable rental-housing fund and the state’s natural area reserve program.

About four years ago, lawmakers decided that nonresidents were buying up Hawaii’s limited supply of housing, albeit at the high end of the market. They separated out residential property into a different schedule imposing substantially higher rates on residential property where the new owner would not be qualified to claim the home exemption under the real property tax. Sounded like a good plan if one assumes that all such property was bought by those filthy rich non-residents who are buying second homes in Hawaii, especially for properties valued at over a million dollars. But when one stops to think about it, those three and four story walk-ups in urban neighborhoods that provide affordable rentals are probably valued at over a million dollars. Even those homes valued at less than a million dollars will probably house a family who can’t afford to purchase their own home. Thus, the very people that lawmakers are trying to help with affordable rental housing are suffering an additional burden as landlord will more than likely recover all of their costs in the rent they charge.

With this increased cash flow, lawmakers earmarked another portion of the conveyance tax collections for the land preservation trust fund that would provide resources to acquire “legacy lands.” As a result, 65% of the receipts of the conveyance tax are earmarked for various programs.

Well with the crisis facing the state general fund, lawmakers are now contemplating taking back a bigger percentage of the conveyance tax collections or suspending the earmarking all together. So much for commitment to these programs!

Then there is the cigarette tax where lawmakers have vacillated back and forth on whether or not they should take the monies that are earmarked for the Cancer Research Center and community health centers to shore up the state general fund. Having been chastised in the media, lawmakers are now looking at raising the cigarette tax so that the state tax would be $4 per pack. Add to that the newly adopted federal tax of $1 per pack and the tax will now be $5 per pack. Who knows what kind of impact that will have on consumer behavior and whether or not the cost will be so high as to discourage consumption to the point where the state takes in less revenues than they anticipated.

Should the latter happen, what are programs that are beneficiaries going to do? And that’s the problem with earmarking funds for specific programs. It reduces the flexibility that lawmakers need to address the pressing needs of the state. To access those funds for other purposes, laws have to be changed and beneficiaries of the earmarked funds will have to find other sources of funds.

As lawmakers grapple with the mounting general fund short fall by raiding many of these earmarked special funds, they should take this opportunity to reconsider putting all revenues into the general fund and then use the review and appropriation process to fund only those programs of highest priority.

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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