I Thought There Was Only One Beast to Feed

by Tom Yamachika, Interim President, Tax Foundation of Hawaii

When you and I pay our taxes, we probably expect that the money we pay in will be used toward any and all legitimate financial needs of the state. The one beast that we know about, which we call the state, needs to pay people who work for it. It needs to purchase goods and services. Our taxes feed the beast. As we learned in school, our Executive and Legislative branches come up with and pass a budget considering and prioritizing all of the state’s needs, and they figure out how much each of us needs to kick in to feed the beast…right?

We wish it were that simple.

A number of our taxes are “earmarked.” When taxes are collected, they go into little pots of money called special funds. Special funds are established for a specific purpose and money in them only can be expended for that purpose. Let’s take an example. $33 million of the transient accommodations tax each year goes to the convention center enterprise special fund, $82 million goes to the tourism special fund, $93 million goes to the counties, and $3 million goes into unnamed special accounts subject to the mutual agreement of the Department of Land and Natural Resources and the Hawaii Tourism Authority. Anything left after all of that can go to pay the state’s regular bills.

What this means is that our lawmakers, over the years, have created a bunch of little beasts that also are feeding off the taxpayers’ trough. This creates at least two problems.

First, the Hawaii Constitution has a spending ceiling. It was adopted by Hawaii voters to make sure that the size of state government would not be growing out of control relative to the growth of the economy that’s there to support it. However, it only applies to the big beast, namely the general fund. What you feed the little beasts doesn’t count. So that is one way for lawmakers to get around the restrictions that you, the voters of Hawaii, laid down to protect the state.

Second, special funds are easily lost track of, and can only be expended for a specific purpose. If the Legislature, in its wisdom, decides that spending on that purpose is no longer justified or needs to take a back seat to another more important program, too bad. The result is that if there is an urgent priority for our state and the general fund doesn’t contain enough to take care of it, then lawmakers must resort to other means. Maybe the fund could be raided if lawmakers know about it; but if they don’t, they need to do something else. Revenue enhancement, which means more taxes and fees, comes to mind.

Last year, lawmakers took a big step toward this important goal by repealing the earmarking of $45 million annually in general excise tax revenues for the educational facilities improvement special fund. The earmarking provisions for that fund were established nearly 25 years ago, when the amount of funds diverted was $90 million annually. Since then, the 1989 Tax Review Commission found the special fund financing a departure from sound fiscal policy as it restricts budget flexibility, creates inefficiencies, and lessens accountability. The State Auditor also recommended in 1991 that the fund be repealed for many of the same reasons. Over the DOE’s objection, this law was passed, and this little beast has been cut off from the trough.

Good job! One down! There are quite a few more to go, however. Let’s keep moving toward a Hawaii where we only have to worry about feeding one beast.

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