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Putting Specific Programs in Financial Jeopardy

posted in: Weekly Commentary 0
By Lowell L. Kalapa
(Released on 5/24/09)

Besides raising taxes in order to balance the state’s general fund spending plan, lawmakers relied on a tried and true strategy of raiding special funds. While it may not be a cardinal sin, the beneficiaries of those special funds usually feel cheated because the money in those special funds was supposed to be dedicated to the purpose of the fund.

Justifying their raid of revenues from the conveyance tax dedicated for the affordable housing trust fund and the natural area reserve fund that fund conservation land programs, lawmakers proclaimed they needed to balance the general fund budget. However, lawmakers felt bad after taking 5% from each of the earmarked tax collections for these programs after advocates and beneficiaries of these programs bemoaned the loss of positions in the conservation program or the lack of availability of funds to build affordable housing. So legislators decided that to make up the funds taken for the general fund, they would just up the conveyance tax rate, but just on more expensive transactions. After all, they seemed to reason, they didn’t want to hurt their constituents. So they increased rates on properties of either one million or two million dollar transactions figuring only the wealthy can afford that kind of purchase.

What they seemed to overlook is that commercial, industrial, and agricultural property probably falls in the millions of dollars of value when being bought and sold. Thus, the cost of the increased tax rate on those properties will be passed on to the businesses and their customers who occupy those properties, be it a mom and pop store in a strip mall, or acres of pumpkins or lettuce that will show up in the local grocery stores. And lawmakers seem to have a particular penchant for residential property sales where the property will not be occupied by the owner or purchaser.

In their minds they see luxury second homes of some Silicon Valley executive and, therefore, believe they can tax those sales to the max. What they seem to ignore is that non-owner occupied real property also applies to rental properties. For example, the recent sale of Kukui Gardens in Honolulu had a price tag of $72 million and had the new increased conveyance tax rates been applied, the cost of that transaction would have been another $900,000 which would have to be recovered through increased rent.

Then there are the raids on numerous other special funds like the emergency medical services special fund which is funded in part through $5 of your car registration fee. This fund was established to pay for ambulance services throughout the state, but instead lawmakers will tap it for $4 million for the state general fund. Another $750,000 will be taken from the neurotrauma special fund which is funded, in part, from surcharges on all motor vehicle moving violations. The fund is supposed to provide research and assistance for victims of brain injuries.

Finally, one of the raids the legislature authorized just may preclude Hawaii from accessing federal funds. The legislature has proposed taking $16 million from the “Enhanced 911” fund that was established a few years ago to build a system of telecommunications which would pinpoint the location of a cellular telephone when an emergency 911 call was being placed. Unlike landline telephones where the location is known, cellular or mobile phones can be at any geographic location when the call for help is made. Funding comes from the monthly charge on your cellular phone bill of 66 cents.

Although the system is nearly complete, not all the bills have been paid. Because the law requires reimbursement for costs incurred, the counties which operate the system had to “front” the money for building the system and some are still waiting to be reimbursed. However, what is even more critical is that there is federal law called the Public Safety Answering Point (PSAP) that proposes to upgrade emergency response systems that will allow not only cellular calls to be traced but also text messages, video streaming, and other forms of communication.

With this program comes a $43.5 million grant. But the federal law will disqualify any jurisdiction that diverts funds originally raised for the enhanced 911 system to some other use. Thus, Hawaii could be missing out on some valuable federal grants thanks to the legislative raid of the Hawaii fund.

Oh well, it’s just money that lawmakers have now put in jeopardy.

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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