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Yes, Even a White Lie Can Come Back to Haunt

posted in: Weekly Commentary | 0
By Lowell L. Kalapa
(Released on 1/24/10)

Another fundamental point that taxpayers and lawmakers need to recognize is that over the years, the legislature has managed to find ways to dodge constitutional mandates governing the state’s finances.

For example, the state constitution dictates that whenever there is a general fund surplus that exceeds five percent of the general fund revenues received in the preceding fiscal year and this surplus occurs for two consecutive years, the legislature must provide for a tax refund or tax credit in the next succeeding session. However, because lawmakers know how difficult it is to raise revenues, they have consistently chosen to refund a token dollar per taxpayer to meet this mandate. Although Con-Con delegates may have envisioned a more generous refund of excess tax dollars, that is not how the legislature decided to handle this mandate.

Okay, maybe that is not such a big deal especially when lawmakers rationalize that the token refund allows them to continue to pay for such pressing priorities as education. However, lawmakers have managed to play fast and loose with another constitutional mandate that is coming back to haunt them in the form of the current financial crisis. This is the mandate to restrict the growth in the size of government to the growth in the size of the economy that is asked to support that level of spending through taxes and fees.

The constitutional spending limit on general fund expenditures was viewed by the 1978 Con-Con delegates as a much more rationale approach to controlling the growth in state government than limits like Proposition 13 in California which put a cap on the growth in real property tax revenues. Capping the growth in revenues created a number of problems like jeopardizing the debt worthiness of local governments, as they do not have the flexibility to raise the necessary revenue to meet debt obligations. Limiting the growth in the size of general fund expenditures was seen as a way to control the growth in government and tying it to the rate of the growth in the state’s economy made sense in that it was Hawaii’s economic engine that produced the revenues necessary to pay for state spending.

It might have been the best and most reasonable strategy to control the growth in government except for the fact that lawmakers discovered a way to circumvent that spending ceiling. This little white lie to the taxpayers took the form of special funds. Initially, special funds were used to hide the growing state general fund surplus of the late 1980’s when the state general fund was the beneficiary of the transient accommodations tax windfall that was supposed to have been used to build the state convention center.

Not wanting to return those hard-earned tax dollars, both the administration, at the time, and lawmakers cooperated in creating a number of special funds into which general funds were appropriated. In doing so, lawmakers were able to take general fund dollars off the table that would have otherwise increased the size of the surplus at the end of the year. When the next administration came into office, it appeared that the state was broke, because there were few, if any, general fund dollars left to buoy state government.

With a downturn in the economy during the mid-1990’s, lawmakers turned to their stashes of money they had set aside in special funds and raided those funds to keep state government operating. While this all may have sounded like prudence on the part of the legislature, what it amounted to was deception as lawmakers were less than honest with taxpayers that the state had accumulated a substantial surplus, excess money if you will, that could have been put back into taxpayers’ pockets and could have been spent by taxpayers in the state’s economy.

More importantly, this led lawmakers to the practice of creating special funds with dedicated revenue sources for their own pet projects. These are projects that probably could not have competed for state general funds because they were not critical services or the services they provided did not provide a good return for the dollars spent. So, lawmakers set up these programs with special funds and gave them their own dedicated sources of funding.

The problem with that is that technically the size of government has grown, but out of the watchful eye of not only taxpayers, but lawmakers who pay little attention to these programs because they are financed with special funds. Nonetheless, these are programs and resources that should have been financed through the general fund. Thus, Hawaii’s taxpayers are being asked to pay for a government that is much too large for the state’s economy to support.

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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