Ka Wai Ola - Office of Hawaiian Affairs, Volume 6, Number 7, 1 July 1989 — Taxes and You [ARTICLE+ILLUSTRATION]

Taxes and You

By Lowell L. Kalapa, Director Tax Foundation of Hawaii

Spending llmii may jeopardize State's fiscal outlook

The 1989 legislative session considered a number of financial issues whieh will affect all taxpayers and, in the long run, may endanger the fiscal health of our state. The session will be remembered for the marked propensity of lawmakers to spend

your tax dollars. For the first time, since the general fund spending limit took effect the constitutional ceiling was exceeded. Even before the 1989 session began, it was apparent the limit would be ignored. The administration said it planned to exceed the limit cind submitted a budget proposal that went over the ceiling. Two key factors in this were the substantial surplus and continued double-digit growth in tax collections. At the end of 1988, the surplus stood at $470 million. It was accumulated by savings of the previous administration; a $90 million settlement of the liquor tax litigation; an increase in state ineome tax revenues; and most importantly, a strong state economy. Between surplus in the treasury and the prospect of continuing eeonomie growth, lawmakers and the administration focused on state spending and ignored the spending limit. Although the executive budget originally fell within the confines of the spending limit, it did not include the administration's major initiatives for education and the environment and a number of proposals estimated to exceed $450 million. Nor did it include any provisions for public employee collective bargaining increases. The administration predicted that the spending would exceed the limit by $250 million, even without public employee salary increases. Lawmakers agreed to create an educational maintenance special fund and earmark $90 million of general excise taxes for it eaeh year. Lawmakers approved a $50 million sewerage superfund (half the amount requested.) Other programs funded include a state universal health insurance plan; increased funding for mental health services and increased benefits for public assistance. The administration then forwarded tax reform proposal to adjust the individual ineome tax. The legislature approved with little discussion.' The administration estimates that $51 million in tax relief will be afforded taxpayers through medical tax credit, revised tax tables, and an increased standard deduction. Under the gun of adjournment ofthe legislature, collective bargaining contract talks were eompleted with all but the university faculty union. Nearly all bargaining units signed four year eontracts through 1994. The rank and file civil service employees received compensation increases, as did the governor, his cabinet and other administrative officials. Also approved were increased per diem payments for members of the board of education and Office of Hawaiian Affairs. Lawmakers who won their seats in 1988 received a substantial pay increase whieh had been set by the salary commission in 1987. After pleas from the counties, the administration offered to transfer the liquor and tobacco taxes to them. Many recognized the inelasticity of these tax sources. When maintenance of state parks was thrown in they became even less attractive. The legislature put the transfer aside and gave counties an unrestricted $70 million for 1990. The Constitution requires the legislature to

enact a general tax credit when the surplus exceeds five percent of the total general fund revenues two consecutive years. This has happened every year since 1980. After refunds of $100 in 1981 and $25 in 1982, lawmakers approved only token $1 refunds as the state surplus shrank. Faced with the recent surplus of nearly a halfhillion, lawmakers were under pressure to return more than $1. Intheend, after committing muchof the surplus to new programs, the legislature set aside $112.5 million for a refund tax credit or a refund of $125 per taxpayer. The general fund was by no means the only show in town. There was great interest in special funds. A state highway financing task force, upon reviewing revenue needed for state highways, recommended a fuel-and-weight-tax increase and higher vehicle registration fees. With the looming surplus, the governor rejected the task force recommendations. Instead, the administration proposed a transfer of surplus concession fees from the Waikiki duty-free operation into a new transportation special fund. Then funds from the

new fund could be transferred to other transportation funds needing assistance, including the highway special fund. At first it appears the highway fund would be the initial beneficiary but money from this new fund could be transferred to the harbors fund, too. In light of the administration's ambitious plan for the redevelopment of the Honolulu waterfront, this scheme would provide a ready source of funds. Airport-users questioned the legality of the transfer in light of covenants with the federal government. Lawmakers approved the measure with the eondition that the transfer proposal be approved by the Federal Aviation Administration. So, pending a nod from the federal govemment, funds from the duty free operation in Waikiki will be deposited into this new fund but may not be spent. How all of these changes to state bookkeeping and expenditure will affect taxpayers only time will tell. However, with all of the spending commitments made this year, it appears taxpayers will have to keep digging deeper into their pockets for the money to keep state govemment operating.