![]() Maintenance of Effort By Tom Yamachika, President At the top of my list of pending legislation this week is the “maintenance of effort” bill, House Bill 611 and Senate Bill 815. What it says is if the appropriated budget of the Department of Education (DOE) drops from one year to the next, the difference in the appropriations is immediately scooped out of general excise tax collections and plopped into a “public education stabilization trust fund” that the Department of Education can then use “to fund any program in the state budget.” And that’s not all. Another provision of the bill directs that if the state reduces the amount appropriated to DOE, then the amount appropriated will automatically change to “the aggregate proportion of the department's annual appropriations from the state general funds over the preceding ten years.” So how would that work? Let’s say the DOE is budgeted $2 billion this year, fiscal 2022, which constitutes 13.5% of a total state budget of $15.4 billion. In general funds, it gets $1.7 billion, which is 21% of $8 billion of the total general funds spent. Let’s suppose that the bill passes and that in fiscal 2023, the DOE is budgeted $1.9 billion, 12.3% of a total budget of $15.5 billion. Of general funds, DOE gets $1.5 billion, 19.7% of $7.8 billion total. The provisions in the bill would sequester $100 million from general excise tax collections and put it into the stabilization fund, and it would unbalance the budget by changing the $1.5 billion general fund appropriation to the 10-year average proportion of the total general fund, perhaps 21% of the $7.8 billion or $1.63 billion. So, DOE would get $130 million more in general funds than budgeted, and another $100 million would be clawed out of the general excise tax collections. That $230 million would need to come at the expense of something else. Or a whole bunch of something elses. Bills like this one illustrate the creativity and the lengths to which proponents of a particular activity are willing to go to avoid the annual appropriation process. Appropriation is not supposed to be difficult. Lawmakers, with the help of our Council on Revenues, figure out how much money we’re expected to collect. They listen as the various executive agencies and departments show them what their respective programs have achieved for the people of Hawaii. Lawmakers then decide which programs and services are worthy of how much of our hard-earned taxpayer dollars, and off we go for another fiscal year. This, however, isn’t enough for some people, who are absolutely fixated on securing a “dedicated funding source” for their favorite program or department. A dedicated funding source usually means setting up a special fund, which is tougher to police using the appropriation process, and a grab on tax revenues before they can be counted with the rest of state realizations during the budgeting processes. Dedicated funding sources can and do protect inefficient or questionable programs and expenditures. Legislators argue that the Legislature exercises more than adequate oversight over these special funds even though they aren’t covered in the normal appropriation process. But how does that explain findings like the State Auditor’s Report No. 20-06, which found more than $75 million in accounts associated with inactive special or revolving funds? Or Report No. 20-07, which found tens of millions of dollars in special funds that swelled in size over the years, indicating an imbalance between the so-called dedicated funding source and the programs and services it was supposed to fund? Or Report No. 20-08, which built on Report No. 20-06 and made the bold statement, “More than $483 million in excess moneys may be available to be transferred from 57 special and revolving fund accounts to the General Fund without adversely affecting programs”? Maintenance of effort is supposed to be earned. If a program or service efficiently delivers value to the people of Hawaii, then it is worthy of our continued support. It’s not supposed to be forced by tax grabs, special funds, and other gimmicks. We need to start recognizing that this “dedicated funding source” rhetoric is taking us down the wrong path.
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What Are They Thinking?
By Tom Yamachika, President This week, we continue coverage of our legislature by highlighting some of the more unusual or remarkable tax bills being considered. We focus on bills that not only have been introduced, but that have gotten a hearing before a legislative committee and are actively moving toward enactment. House Bill 65, for example, requires a tax clearance before any professional or vocational license may be issued or renewed. Some regulatory bodies, such as the contractors’ licensing board, do require tax clearances already. But should the same requirement apply to realtors, doctors, cosmetologists, and physical therapists? We’re concerned that there are 160,000 licenses out there. If each of them needs to be cleared every year by a system that now issues about 10,000 clearances a year, for example, it’s easy to see how the Department of Taxation might not be able to keep up with demand. Maybe they’ll have to rent some space in the convention center, bring in a bunch of workstations, and ask for a bunch of volunteers to help get the work out, just like how the Labor Department has been getting help pumping out unemployment claim determinations. The House Consumer Protection Committee heard this bill and is advancing it with some amendments. Senate Bill 775 tries to deal with the concern that we have too many tourists on our shores (which certainly isn’t the case now). As introduced, the bill looks at visitor arrivals every year, and for every year that visitor arrivals equal or top 9 million, the transient accommodations tax (TAT) rate is automatically hiked by 2 percentage points. If our visitor arrivals drop below 8 million, the TAT drops by 2 percentage points the following year (but not below the 10.25% rate where it is now). The Senate Committee on Energy, Economic Development, and Tourism heard the bill and is passing it out with amendments. Senate Bill 202 tries to stick it to the rich by eliminating the state income tax deduction for mortgage interest on a second home. It also specifies that the amount of state revenue saved be deposited into the rental housing revolving fund. The Department of Taxation pointed out in testimony on a similar bill last year that implementing a deduction disallowance is doable but figuring out how much was saved might not be. Hawaii net income tax phases out itemized deductions for higher-income filers, so they might not get any appreciable benefit from a second home mortgage deduction. The Senate Committee on Housing heard the bill and passed it out with no changes. Senate Bill 497 would award a nonrefundable income tax credit to incentivize the food manufacturing industry in the state. The income tax credit would be, up to an unspecified dollar ceiling, 100% of the expenses a taxpayer incurs for buying food manufacturing equipment, training employees on its use, improving energy efficiency in the manufacturing process, or studying or planning the implementation of a new food manufacturing facility. Now, a 100% credit means that up to the dollar ceiling, the food manufacturer pays nothing and the taxpayers of Hawaii pay everything. I would have thought that lawmakers learned about 100% credits through their experiences with the qualified high technology business credit in the early 2000’s – yes, the credit that was widely regarded as a fiscal disaster. That bill was heard by the Senate Committee on Agriculture and Environment, and will move forward in an amended form. Hold on to your wallets, folks, because this year’s great legislative adventure has just begun! What Are They Thinking?
By Tom Yamachika, President In the beginning of February each year, the Japanese celebrate the Setsubun festival. The festivities typically include roasted beans. Family members throw them out the door, or start pelting one of their own members who is dressed up like a demon, to represent driving out the bad luck and welcoming in the good luck. At the Legislature, we’re not throwing the beans, we’re counting them. And there’s a lot of counting to do because there is so much less money available this year to fund the things that government is used to doing. (I didn’t say that government “needs to be doing” or “must do” them. That remains to be seen.) At the Legislature, committee hearings have begun in earnest and it doesn’t seem at all like we are in an economic crisis. Committee after committee is hearing all manner of bills expanding or extending tax exemptions, credits, and other incentives. These revenue cuts, sometimes known as tax expenditures, will need to be paid for somehow, but perhaps the legislators on those committees are leaving that decision to the money committees, the Ways and Means Committee in the Senate and the Finance Committee in the House, to make those tough calls. Perhaps the goal for the legislators in the non-money committees is to mollify their respective constituencies, thinking that the overall effect of their little bills will be minimal compared with the huge problem that we’re all facing. In other words, creating little islands of happiness adrift in the sea of pain. Some of the bills getting current hearings include HB 359 / SB 1321, which would grant a casino license to one lucky party who will be able to run their casino on Hawaiian home lands. It won’t be cheap, however. Just applying for the license will cost at least $1 million. Getting the license will set the winner back another $5 million. There will be a 45 percent tax on gross gaming revenues. And lease rent to be paid to DHHL is extra. HB 433 would create a “Climate Change Mitigation Surcharge” of an unspecified amount on the rental of a motor vehicle. But, although this surcharge looks suspiciously like the rental motor vehicle tax we already have, the bill drafters carefully put the surcharge provisions in a statutory chapter that the Department of Land and Natural Resources administers. So, does that mean DLNR is going to need to start hiring and training tax collectors. Why don’t we just come out and say it’s a hike in the rental motor vehicle tax? HB 1174 / SB 921 require our tax folks to get greedier. It changes the motion picture and TV production credit so that if a single production wants tax credits aggregating more than $15 million in two taxable years, it needs to give the State a quarter percent of worldwide gross revenues of the production. Forever. And meow! There’s a turf war heating up over the motion picture and TV production credit. SB 932 would boot DBEDT’s Creative Industries Division out of its role administering the production credit, and it would substitute the Hawaii Green Infrastructure Authority. Why? According to the bill, HGIA “has better financial expertise than the Hawaii film office to evaluate the paperwork submitted for the motion picture, digital media, and film production income tax credit.” We hope their expertise with feature films and TV productions doesn’t just come from watching them. And our legislative session has just begun! More interesting and creative ideas are bound to come up, and we will be here to share them with you! |
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