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Alternatives To Tax Increase Need Serious Consideration

posted in: Weekly Commentary 0
By Lowell L. Kalapa
(Released on 3/28/10)

Last week’s commentary elicited a firestorm of comments from readers demanding why lawmakers need to raise taxes to close the budget gap.

Some readers wondered why the legislature couldn’t tighten the state’s belt like businesses and families have while others questioned why the public employee unions won’t take a pay cut but still work a full 40 hour week. Still others couldn’t believe that beneficiaries of the numerous tax incentives couldn’t wait a few years to claim their windfall.

Still others questioned how the state got into this financial mess and why did lawmakers have to resort to tax increases when everyone acknowledges that Hawaii has one of the heaviest tax burdens among the 50 states.

So how did we get into this financial mess? One good reason is that over the years lawmakers have forgotten how to say “no.” After all, their number one goal in life is to be reelected and they certainly want to curry as much favor with every constituency in the community. As a result, programs and services were created to meet this or that constituent’s demand to the point that government is now in the business of providing services and programs that are really not the responsibility of state government.

This became very apparent when the Senate Ways & Means Committee held a hearing on a proposal to “raid” excess amounts of cash from a variety of special funds. Special funds have been the fad of the day for more than 15 years when the various departments were charged with becoming self-sufficient at another time when the state was going through a crisis of being short on money. Probably the most successful department was the department of commerce and consumer affairs which regulates and monitors the various professions. They were so successful that by the end of the 1990’s they were generating annual operating surpluses equal to their annual operating budget. That department had generated so much money that they eventually were able to purchase their own building with cash. Although they argue that they actually issued bonds to finance the  purchase, the reality was that the state general fund needed the cash so it went to the state general fund and the budget department, in turn, issued bonds to pay for the building.

What became very apparent in the Ways & Means Committee hearing was that little fiefdoms have been created and very little notice is given to how much the various special funds raised through fees and charges or in some cases earmarked taxes. That is until now when the general fund is running on fumes and needs infusions of cash to pay all the bills of the state.

Underscoring the fact that lawmakers know very little about how much money or what sorts of activities are in special funds, one department corrected the chair of the committee saying that the balance that she had quoted for one of the funds was incorrect. The chair shot back that the balance she quoted came from the official report that is required to be made to each session of the legislature and if the balance had changed why had the department not updated that information?

While there are some legitimate special funds, such as the state transportation funds because the state receives federal dollars earmarked for airports, harbors and highways, many of the special funds created in recent years were formed because either the beneficiaries no longer wanted to come to the legislature to justify their programs and expenditures, or as some called it, begging for funding, or they thought they could hide from the budget ax whenever the state general fund went south.

But as senators were told, once a special fund is created, there is little reason to pay attention to those funds and the programs they finance. Because the money is earmarked, they can’t be used for anything else, at least until the need for general funds looms like the current budget shortfall.

Special funds become “out of sight and out of mind” and the people who benefit from those programs are no longer held accountable for the expenditure of those moneys. More importantly, these special funds erode the flexibility of lawmakers to alter programs depending on the changing priorities of state government. It locks lawmakers into a corner because they no longer can shift moneys between programs or for that matter reduce or eliminate irrelevant programs. Bottom line is they need to get rid of these special funds.

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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