Ka Wai Ola - Office of Hawaiian Affairs, Volume 6, Number 4, 1 April 1989 — Taxes and You [ARTICLE+ILLUSTRATION]

Taxes and You

By Lowell L. Kalapa, Director Tax Foundation of Hawaii

Questionable Practices in Handling Our Tax Doilars

Making its way through the legislative process is a bill whieh raises questions about the way govemment should handle our tax dollars. This measure should eoneem all taxpayers. It proposes to earmark $90 million in general excise tax revenues to

underwrite a new educational facilities special fund. What's so bad about taking care of our school facilities? There is nothing wrong with giving priority to school buildings. What is wrong is how it is going to be accomplished financially. This earmarking of $90 million will last for seven years, contributing $630 million to this special fund. Together with the interest that would be earned on the fund, there would be about $800 million over the next 19 years to undertake an aggressive school construction program. What's wrong with that you say? First, the proposal would take what have been up to now general fund revenues, and set them aside in a special fund. Moneys in this fund ean only be spent for the designated purpose, say, construction of school facilities. Thus, if lawmakers in a future session run short of cash to keep the state operating, they will not be able to dip into this fund without repealing the law. Certainly in this time of huge general fund surpluses it would appear that this earmarking should not hurt the state's ability to fund its operating programs. On the other hand, some economists are already forecasting a recession within the next

year. Should some kind of downturn in the economy occur, tax revenues may not be realized in the same magnitude. lf revenues fall below what is required to keep the state operating, then taxes may have to be raised or alternatively, spending may have to be reduced to keep the budget balanced. Another major eoneem is that this proposal would use current tax collections to build facilities whieh will benefit many generations of taxpayers. Today's taxpayer is being asked to pay for buildings that other years from now will be using. This is the reason why government usually borrows the capital to build such large facilities. By issuing bonds whieh must be paid back over aperiod of time, the cost of the facility is spread over several generations of taxpayers. Now the administration is arguing that by using cash, the state will be able to save over a billion dollars in interest. Certainly, by not issuing bonds to build these facilities, there will be no interest costs. But in taking cash from the taxpayer now, the taxpayer loses the opportunity to invest that cash and eam the interest for himself. Further, as we all know, inflation will take its toll on the value of the dollar and the sums to be repaid on the borrowed funds will be paid for with "eheaper" dollars in the future. In short, government is asking the current taxpayer to sacrifice what wealth he has now for the benefit of future generations. Speaking of future generations, by paying for these capital improvements now, what does it say about the accountabi!ity of future generations? Will those future generations eome to expect something for nothing as the cost of these facilities have been paid for by earlier generations of taxpayers?

This situation is not unlike the misunderstanding of the cost of running Honolulu's bus system. For more than a decade the bus fare remained at 25 cents. People believed that the two-bit farecovered the cost of operating the system. By the early 1980's it became clear that the true cost was being underwritten by the real property taxpayer. So the city eouneil raised the fare to 60 cents, and even then that level of fare did not cover the complete cost of providing bus service. However, bus users continue to think that the service ean be expanded at the same 60 cent fare. This is really expecting something for nothing. Finally, perhaps the most onerous aspect of this measure is that to earmark general fund revenues circumvents the constitutional ceiling on general fund expenditures. Since these funds would otherwise be a part of the general fund pot, taking them out before they become general funds and sticking them in a speeial fund would exempt them from being subjectto the spending ceiling. In other words, eaeh year that money is appropriated out of this new special fund, those expenditures should really have been counted against the ceiling. It makes one wonder if indeed this is a way the administration is trying to spend as mueh as it ean and yet not be very obvious about violating the intent and spirit of the ceiling. Sure, as we said in the beginning, education is a motherhood issue— no one wants to argue against it. In this case, the way education would be paid for violates sound principles of good public finance. To look at it in another light, is the administration implying that the legislature does not have the wherewithal to appropriate these funds eaeh year as the needs demand?