So You Want A Stable Funding Source?

by Tom Yamachika, Interim President, Tax Foundation of Hawaii

In a previous column, we spent some time discussing “temporary tax” and why it may have a meaning at the Capitol that’s different from what you and I may think.

This week we look at the term “stable funding source.” In business, there is no such thing. There’s always competition for customers, and even the most loyal customers can be acquired, fall upon hard times themselves, or die. At the Capitol, however, many governmental units clamor for “special funds,” namely little pots of money that are used to fund specific programs or services. Then they want “earmarks” that redirect dollars from a specific tax to feed the special funds. To them, a special fund fed by an earmarked tax is a stable funding source.

But let’s think about that. Let’s say an agency has two programs, program A funded by an earmarked tax and program B funded by a general fund appropriation. The underlying source of program A’s dollars is one tax, and that for program B’s dollars is all state taxes (without earmarks). Obviously the risk to the underlying dollars is less if you have more sources for those dollars. After all, something could happen to one tax. If the earmark was on the conveyance tax, for example, there would be a risk to the underlying dollars if the real estate market dried up. But that wouldn’t necessarily impact general fund revenue because there are a number of other taxes that might make up for it. So if the agencies are saying that program A has a stable funding source and program B doesn’t, there has to be another reason.

All agencies, and a few attached governmental units, need to go through a budgeting and appropriation process every year. The agency's accomplishments and funding requirements are scrutinized. If an agency doesn't sufficiently justify one or more of its programs or services, it may find them axed. And even if an agency does adequately justify its operation, lawmakers have the right and obligation to prioritize state resources so dollars used to fund a certain program or service may be redirected to higher priority items.

Government agencies have found this process to be painful. They think special funds might be a good solution. Special funds are there for a specific purpose, the legislative oversight over such funds is much less organized, and there’s less competition for the funds because the purpose of the funds is specific. Of course, special funds are regularly reviewed and can be raided--but that is not a frequent occurrence.

So it seems that the definition of a stable funding source is something that gives an agency dollars without the annual hassle of going to the Capitol to beg for it during the appropriation process. But wait – why do we have an appropriation process anyway? Agencies justify their existence and discuss their funding needs before lawmakers and the public, which is what they should be doing. That’s called transparency in government. We, as taxpayers who are footing the bills here, should insist on transparency. If “stable funding source” is being used as a metaphor for “money without legislative and public oversight,” we need to be very suspicious when an agency or a governmental unit is urgently insisting upon a stable funding source.

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