Flexibility lost, tax increases guaranteed with earmarking

Lawmakers and special interest groups believe if they can secure a guaranteed source of funding for their pet project or program they won’t have to worry about future funding needs.

Earmarking of revenue sources comes at a very high price for all programs and projects, as well as for taxpayers who have to fork over the dollars to keep state or local governments operating. Earmarking takes funds away from the general pot used to fund the operations of state and local governments. Legislators or council members must either cut programs or services that would otherwise be deemed essential to the health and safety of the community or raise taxes to make up for earmarked revenues.

The practice dates back decades to when state lawmakers first used the device as a way to hide surpluses in the state general fund. When the general fund balance or surplus at the end of the 1980s mushroomed to more than a half billion dollars, lawmakers earmarked $90 million of general excise tax collections for an educational facilities fund to meet the huge backlog of school maintenance projects. Few, if any, opposed the idea. As one senator put it, in passing the bill out of committee, “This is our commitment to education.”

The state’s financial picture soon went south and lawmakers turned to this earmark-financed special fund to pay for operating costs and changed the financing mechanism to bonds, or debt. That same downturn spurred efforts to earmark other general fund tax resources for various programs. Such was the effort to earmark the conveyance tax imposed on the transfer of real property. The rate was doubled in the early 1990s and earmarked for affordable housing and funding the state trails program.

Earmarking resources not only hides the true cost of government, but also reduces the flexibility policymakers need to address needs. That is why a proposed amendment to the Honolulu City Charter to earmark one-half of 1 percent of all general fund revenues each year for a grant-in-aid program for nonprofits would seriously impair the ability of future county officials to address the changing needs of the city and holds the potential for guaranteed increases in taxes, in particular the real property tax.

Several years ago, amendments to all four county charters were proposed that earmarked 1 percent of real property tax revenues for the purpose of funding affordable housing programs and for the protection of conservation lands. For the past fiscal year, that meant $8 million was earmarked for these programs — $8 million that was not spent on essential services. If cuts are not made to these services, the council will have to raise another $8 million in real property taxes.

Thus, the charter proposal to earmark one-half of 1 percent would tie up another approximately $5 million that could either result in further cuts in services or a $5 million tax increase. The earmarked funds could only be used for the grant-in-aid program. This would preclude the council from using this money for programs that might be considered a higher priority should a need arise.

Given that this program could only be used to fund nonprofit agencies that currently enjoy complete exemption from the real property tax, should the amendment gain approval there would be even more reason to consider charging nonprofit organizations for the services they use since the new grant-in-aid program would reflect a double subsidy by taxpayers for these tax-exempt organizations.

This proposal to earmark yet another source of city and county revenues should be soundly rejected.

Lowell L. Kalapa is president of the Tax Foundation of Hawaii.