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Quarter Full View as a Result of Limited Information

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By Lowell L. Kalapa
(Released on 6/28/09)

The earlier commentary on the furloughs for public employees elicited responses from both sides of the aisle depending, of course, on whether or not the author was a public employee or an employee or business in the private sector.

What those responses did reflect was a lack of understanding of the reality of the financial situation faced by the state and differences between public and private sector employment. Perhaps it is incumbent that little time is spent on these two issues to clarify the limited alternatives available and the consequences of those alternatives.

Let’s take the financial situation first. Funding for state government comes from a variety of sources, the most obvious of which are taxes levied by state government including the ubiquitous general excise tax often called the state’s sales tax. The other obvious state tax is the net income tax on individuals as we see it deducted from our wages and salaries before we get our take-home pay. Not so obvious taxes include the taxes on businesses such as the net income tax, the bank franchise tax, the public service company tax on public utilities, and the specific excise taxes on alcoholic beverages and cigarettes because those taxes are buried in the price of those specific products.

While most of the proceeds from state taxes go into the state general fund, there are some taxes that are earmarked for specific purposes and, therefore, go into what is called special funds. These include the state vehicle taxes like the gasoline tax, motor vehicle weight tax and vehicle registration fees. The transient accommodations tax or hotel room tax is earmarked for visitor promotion and other visitor related programs and underwrites the grants-in-aid program for the counties. Some of the proceeds also go into the state general fund. Another earmarked tax is the conveyance tax which funds the affordable housing trust fund and the natural area reserve program of the department of land and natural resources and more recently the Legacy Lands fund.

But the general fund is really at the heart of the problem as it represents nearly half of the total state budget or about $5.4 billion of spending for each year of the fiscal biennium. While there are other resources for the general fund, the bulk of the proceeds comes from taxes. Thus, when the Council on Revenues revised its forecast of general fund tax revenues downwards creating more than a $2 billion shortfall, that holes represented more than 20% of all state general fund spending for the next two years. And it appears that actual tax collections may sink even lower before this fiscal year is over.

To raise a billion dollars per year from current general fund tax resources, rates would have to be increased to generate another 25% in general fund tax collections. But raising taxes by that amount in a slumping economy probably won’t generate any where near the amount needed because of the slower economic pace. Thus, state officials have very few options for generating additional revenues despite the call by the public employee unions for an increase in taxes.

On the other side, as the day draws closer to the furloughs being sought by administration officials, the public employee unions, as expected, are taking the issue to the courts. But what if the furloughs are thrown out? If the state has no money, are they going to issue IOU’s instead of paychecks? And if lawmakers come back into session and raise tax rates, how many families and businesses will be able to meet those new obligations? Will families move out of state and businesses close down? Or as the governor has suggested, will the state have to lay off workers? And what kind of economic impact will that have?

If public employees want to know what it is like to be unemployed, they should ask their brothers and sisters in the carpenters union where it is estimated that nearly 3,000 are on the bench; or ask the Aloha Airline’s employees who have yet to find a job, or the former employees of Molokai Ranch.

Finally, public employees say that they are paid substantially less than their private sector counterparts. On the whole that is not entirely true as there are disparities both ways. But what is true is that public employees have far more generous benefits than those in the private sector and unlike those in the private sector, they are not employed at will but enjoy job security that cannot be found in the private sector. So taking a pay reduction as a result of a furlough is far better than having no paycheck at all.

Next week we will look at a comparison of public and private employees.

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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