No, Boosting the Affordable Housing Fund Isn’t the Answer

by Tom Yamachika, President, Tax Foundation Hawaii 

Many financial and political experts (or people who say they are) are trying to make sense of the defeat of Honolulu’s Charter Question No. 1 in the general election earlier this month. 

The charter question put before Oahu voters was whether the percentage of real property tax money that the city would deposit into the city’s Affordable Housing Fund should be increased from 0.5% of total property tax collections to 1%.  The difference was estimated to be $8 million a year.  The amendment failed, 129,097 against versus 120,770 for.

Some proponents of the measure, as reported by Civil Beat, noted that taxpayers wouldn’t have to pay more in taxes under the amendment.  They were wondering why taxpayers didn’t “get it.”

Well, sure, that particular measure by itself doesn’t affect how much property taxes people need to pay.  Nor does it affect how much money is going to be spent on affordable housing.  Rather, it is essentially a budgeting gimmick.

The Affordable Housing Fund is a special fund.  We’ve spoken at length about special funds several times before.  Basically, such a fund sidesteps the normal budgeting process because money in the fund is spent on the fund’s purpose without regard to anything else in the budget.

So, what happens if $8 million in property tax collections is diverted to the Affordable Housing Fund?  There is a range of possibilities.  On one end, suppose $8 million in general fund resources had been budgeted to affordable housing.  With the diversion, the Council would be free to reallocate the $8 million from the general fund to other priorities, meaning that there would be no change in the amount of money going toward affordable housing – so the ballot measure accomplished nothing.

On the other end of the spectrum is that $8 million more is going to be spent on affordable housing, which is what the proponents of the measure presumably want.  If there is no change in city revenues, then, there will be $8 million less to pay everything else that the City & County of Honolulu is responsible for.  Given that the City’s operating budget totals $2.91 billion, $8 million, although not mere chump change, might be a small enough dent to be absorbed.  Thus, the folks who are saying that this measure won’t raise taxes, or inevitably lead to raising taxes, do have a point.

But there is another point to be considered.  We elect our City Council members to make sound budgeting decisions.  Many different causes and programs compete for the tax dollars that you and I pay the government.  Special funds, like the Affordable Housing Fund, take the decision out of the hands of the Council, giving it less flexibility to adapt to changing needs and conditions.  Maybe one or a few special funds might not be hard to work around, but when you get to hundreds or thousands, as we already see at the state government level, putting together a budget can be a very complicated exercise.

And if one special interest group or constituency succeeds at establishing a dedicated pot of money or expanding the amount of resources that are fed to it, then what is to stop other special interest groups or constituencies from ramming through their own special funds to feed their pet projects?  Again, we already see this happening now at the state level, so this possibility can’t be easily shrugged off.

Rather than contributing to a vicious cycle of enacting more and more special funds to sap our Council’s budgeting flexibility, we should just recognize, as the voters apparently did, that special funds are not the answer.