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Tapped Out and Bone Dry

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By Lowell L. Kalapa
(Released on 9/27/09)

Recent arbitration hearings over public employee compensation found union representatives arguing over how much money the state has available to fund the public payroll.

At issue was the general fund balance at the end of the 2008 fiscal year and, therefore, what was available to operate government for the 2009 fiscal year. Because the state’s Comprehensive Annual Financial Report or CAFR for fiscal year 2009 is still being put together, the only audited numbers were from fiscal year 2008. However, the union representatives were attempting to reconcile the audited 2008 general fund balance with the budget projections made by another department, the department of budget and finance which forecasts the state running a deficit for fiscal year 2009 and beyond.

The difficulty the union representatives were having was that the audited general fund balance differed from the general fund balance used in the budget projections. That is because the audited financial report is presented on what is called GAAP accounting that accrues both revenues and expenditures and the budget projections are made on the basis of what cash is available. The accrual accounting method takes into account revenues that are expected to be received in the subject fiscal year as well as expenditures that were incurred in that year but have yet to be paid. On the other, the budget plan is based solely on what cash is available at the start of the fiscal year and what cash is left over at the end.

In the current fiscal crisis, if there is no cash forecasted to be coming in the revenue door, then budget makers have to restrict spending in anticipation of the cash shortfall. This is where the revenue forecasts made by the constitutionally mandated Council on Revenues become critical. As the crystal ball gazers weigh the economic indicators as bell weathers of what is to come, the seven-member panel must determine how much in revenues will be realized in the foreseeable future.

That means they must determine how much cash will come into the state’s treasury over the next two years of the biennium primarily from general fund tax resources. But that task has become increasingly more difficult, not only because of the turn in the economy, but also because lawmakers have mangled the tax system so that it has made the task more difficult. Probably the most insidious mechanism lawmakers have added to the tax law is the unbridled use of tax credits under the income tax law.

Because the claim for tax credits is not dictated by any economic indicator, the Council has no way of forecasting how taxpayers will react in making the necessary expenditures that would qualify for the tax credit. Since there is no maximum aggregate amount in how much can be claimed, tax credits become a wild card, draining revenues in many cases with no rhyme or reason. And until recently, because taxpayers were not asked for more specific information about the expenditures that qualified for the tax credit, neither tax department personnel nor the members of the Council on Revenues had any idea of what propelled the claim of these tax credits.

So while union representatives may want to argue about how much of a balance was in the state general fund, the bigger fish to fry is how the tax system has been corrupted all in the name of encouraging certain types of behavior. What is more ironic is that while taxpayers are promised that these tax incentives will create better jobs for future generations, that future generation is sharing textbooks, perhaps having a shorter school year and perhaps having larger classes of students because there is no money.

The other complication is the creation of user fees to fund special funds which hide the true cost of government. Since it is difficult for lawmakers to raise taxes as evidenced by this past session’s resort to taxing the rich, tourists and large real estate transactions, lawmakers have resorted to user fees which they then earmark to operate programs that probably have no business being provided by government or it allows them to free up general funds to pay for yet another program or service. Like it or not, these user fees are thinly disguised tax increases as they allow lawmakers to grow government beyond the capacity of the state’s economy to support that size of government.

The result is the current fiscal crisis where lawmakers have nowhere to turn to raise additional revenue because the taxpayers are tapped out and bone dry with no more to give.

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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