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Elusive Unfunded Liability Needs To Be Addressed Without Tax Increases

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By Lowell L. Kalapa
(Released on 9/23/12)

One of the drivers behind the recent Tax Review Commission’s inquiry into whether or not the state’s tax system is adequate to fund state programs and services is the growing unfunded liabilities for the state retirement system and the public health system for active and retired public employees.

Apparently there are some, including some of the commissioners on the Tax Review Commission, who believe that those unfunded liabilities that combined is estimated to be more than $20 billion must be addressed with increases in taxes. It appears that this is the assumption that both the Commission and its consultant Public Financial Management Group (PFM), make in the report that was submitted and was given a public hearing. The Commission argued that the consultant report’s model merely forecasts what the revenue shortfall would be if times were bad and what the surplus might be if times were good.

What all the fancy computer modeling seems to ignore is the human factor in the equation that it is the legislature’s prerogative to decide what will be financed and how those programs and services will be financed. The legislature certainly can consider tax increases, but the way the democratic system works is that all actions taken by those elected officials will be held accountable by the taxpaying public who elects those individuals to office.

What the consultants and their computer also seem to ignore is that by forecasting what the cost of current level of services will be into the future is that it sets targets for negotiators of collective bargaining agreements, off-budget requests made by constituents of elected officials, and unforeseen expenditures by the legislature and the judiciary. When the issue of how much should be appropriated for this or that program or for pay agreements comes before the legislature, advocates of the programs will be able to fall back on this study and say, “Well, you can always raise taxes” as recommended by the PFM consultants. And don’t worry, with or without the consultant’s report there are constituency groups who are already suggesting tax increases to fund their programs.

For example, the administration’s huge push for early childhood care and education has advocates suggesting that the initiative could be fully funded if lawmakers would only raise the general excise tax by a quarter percent. If that suggestion is adopted, one has to ask what programs or services will be next in line to ask for another increase in the general excise tax.

But that gets away from the concern that drove the Tax Review Commission to beat the bushes for new resources – the concern that the state has huge unfunded liabilities for the state retirement system and public employee health benefits. While this is certainly a concern as it affects not only the potential financial crisis but at present it raises questions for the state’s bond buyers who have to be a little skeptical about the state’s ability to fund those liabilities while at the same time be able to make good on the debt the state has incurred by selling those bonds.

There is no doubt that lawmakers have been trying to avoid dealing with this looming unfunded liability ever since they were apprised of the situation. Although attempts have been made to appropriate something to start the pay down of these unfunded liabilities, lawmakers seem to have other purposes for the money and in the end have failed to apply anything meaningful toward the liabilities.

So if lawmakers aren’t going to address these unfunded liabilities with current resources, should they be allowed to raise taxes? The answer should be a resounding “No!”

Lawmakers, as well as their taxpaying constituents, should recall that past legislatures actually raided the earnings of the state retirement system and avoided reform of the public employee health system as far back as 1984. Instead, they took the earnings of the state retirement system and spent those funds on new programs and services; programs and services that have since become perceived as “entitlements.” This makes it difficult for lawmakers, as they need to cut this or that program so they can apply those resources to the unfunded liabilities. While current lawmakers may whine that “they shouldn’t be forced to pay for the ‘sins’ of their forefathers,” they should also realize that if they raise taxes and fees yet again to fund what should have been paid for in the past, they will pay for that sin at the ballot box. If nothing else is obvious from the recent hearing on the Tax Review Commission’s consultant’s report, folks are tired of being tapped to pay for more and more government. You might say that taxpayers are already “tapped” out.

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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