Hawaii Tax Debate: Shaping Good Tax Policy
Facing a more than $800 million budget shortfall for the current fiscal year and the ensuing fiscal biennium, lawmakers will be tempted to pursue 鈥渞evenue enhancements鈥 otherwise known as fee and tax increases which the administration has noted also includes a review of tax credits and exemptions.
Recently, the legislature has fallen prey to the idea that tax incentives, tax credits, exemptions, or exclusions, are a convenient way to encourage certain types of behavior. While the idea of the tax credit has been around for nearly forty years, the first tax credits were utilized to offset excessive tax burdens on those who could not afford that tax burden, largely the poor.
It was not until a few years later in 1976 that lawmakers adopted the first tax credit incentive for solar water heaters otherwise known as alternate energy devices. Even after two rounds of federal tax incentives for these devices, Hawaii law still extends these alternate energy tax credits.
From the beginning, it was pointed out that such tax incentives are nothing more than a backdoor appropriation of public funds that lacks the accountability and oversight normally given to an appropriation of public funds. Any appropriation of public funds undergoes scrutiny by lawmakers as to the public need for the goods or services, priority among other programs or services to be purchased, and the appropriateness of the amount being requested.
Once the legislation granting a tax incentive is adopted, there is no such scrutiny. In fact, until alarms were raised in the past few years, no information was required as to prove how effective these tax incentives have been or how much revenues were foregone as a result of these incentives. For example, it is estimated that by the time the tax credits for the controversial high technology tax credits are claimed, the state will have foregone more than a billion dollars in revenues. At the same time, it is estimated that the number of jobs created by these credits will number barely a couple thousand. Was that a good return on investment of taxpayer dollars?
Tax analysts also are critical of tax policies that create a regressive tax system, that is, a tax system where the poor pay a greater percentage of their income in taxes than high income taxpayers. A transaction tax, such as a sales tax or, in Hawaii the general excise tax, is regressive in that more of a lower-income family鈥檚 income is spent on taxable expenditures than a higher-income family where some of their disposable income will be put into nontaxable expenditures such as savings, investments, travel or the purchase of a home.
Because tax incentives usually require the taxpayer to expend funds up-front before qualifying for the incentive, tax incentives generally tend to favor higher income taxpayers with the disposable income to undertake the desired behavior, be it to purchase a solar water heater or invest in a high technology venture or hotel renovations or residential remodeling.
For these reasons tax incentives are poor tax policy because of the lack of accountability, lack of fiscal control and they tend to create a regressive tax system where the tax benefits are confirmed on higher-income taxpayers at the expense of low-income taxpayers.
Another poor tax policy established in the late 1980鈥檚 and early 1990鈥檚 is the creation of special funds and the earmarking of taxes and fees that were once receipts of the state general fund. Initially, special funds were created as a means of hiding excess general fund revenues at a time when the state general fund was producing annual surpluses of a half billion dollars. After all, lawmakers worked hard to raise those funds by imposing what many agree is an excessive tax burden. Hawaii is among the top five states with the highest per capita tax burden.
Responding to calls to refund those excess funds, lawmakers used special funds to hide the excess funds rather than reduce the overall tax burden. When the state general fund began to hurt for resources in the mid 1990鈥檚 because of the burst of the Japanese bubble, lawmakers then raided those special funds.
As the state general fund faltered, the edict went out to the departments to find ways to become self sustaining. In the case of two departments, health and commerce and consumer affairs, new fees were created for certain services and for those where there were existing fees, those fees were increased dramatically. These fees were then earmarked and placed in special funds instead of the general fund where they had previously been deposited. In the case of the department of commerce and consumer affairs, it became obvious that these fees were excessive when the department was realizing annual surpluses equal to its annual operating budget.
In the case of the conveyance tax which used to be a nominal nickel per hundred dollars of property value transferred, lawmakers decided to raise and earmark it for affordable housing and the state land department. Somehow lawmakers felt that there was a connection between sales of real property and these two programs. And when lawmakers last session wanted to raid the conveyance tax receipts, the beneficiaries of those programs wailed and gnashed their teeth until lawmakers raised the tax rate yet again and took only part of the increased revenues.
Now there are literally hundreds of special funds that are either funded with resources that were formerly resources of the general fund or are programs that used to be funded with general fund appropriations. These special funds are sitting there with millions in fund balances, all out of the reach of lawmakers struggling with the general fund shortfall.
Again the lack of accountability and fiduciary oversight makes earmarking of taxes and the creation of special funds poor tax policy. Those special funds allow lawmakers and the administration to abdicate setting priorities for public funds and permit the circumvention of the constitutional ceiling on general fund expenditures.
