by Lowell L. Kalapa, Tax Foundation of Hawaii

The fiscal problems of the state continue, as lawmakers will have to deal with another budget shortfall before the end of this legislative session. However, it does not appear that they will go to the tax increase well again this year.

So taxpayers might ask if this is all a result of the poor economic situation of the last few years or is there a more systemic problem? Believe it or not, Hawaii has created the financial crisis it faces today over the last 25 years as a result of elected officials attempting to pander to their voting constituents. It is not only the elected officials of today that have contributed to the fiscal woes of the state, but those who left a legacy of financial mismanagement.

And to a large degree, it is the voters of these elected officials who have failed to hold them accountable and, in some respect, responsible for encouraging these elected officials to be less than responsible. What? Moi, you may ask? Over the years, the squeaky wheel has asked for more and more services to be provided by state government, figuring that if there was money to be had, why not ask. And indeed, in the past 30 years, when there was extra money to be had, lawmakers and administration officials spent whatever was in the till.

The result is what we find today, state government involved in more services than ever before, and in many cases providing services that are already being provided by the private sector. The latest venture that has caught the eye of lawmakers is the establishment of a state bank. What, you say, a state-run bank? How do lawmakers expect to run a bank when they don’t even seem to be able to run the state in a sound financial position?

Well, a group of constituents believes that the state would be able to help poor borrowers who are about to go under or people who want to secure loans but can’t from commercial banks. But what that really means is that state lawmakers think the taxpayer should get into the business of making risky loans or bailing out folks who probably should never have taken out such loans because they did not have the financial wherewith all to repay the note.

In other words, these lawmakers want taxpayers to take on what would otherwise be consider toxic loans, or as in the last debacle, make sub-prime mortgages.

Once again, taxpayers are about to be fleeced just because some lawmakers want to respond to a specific constituency. But can you blame these lawmakers, for after all they have learned well from their predecessors about spending money on services and goods that should never have been the responsibility of government.

That’s the very problem with what has happened with the state of government finances over the last 30 years. Beginning with the adoption of the hotel room tax or TAT in 1986 which had been proposed at a 2% rate to be earmarked for the building of a convention center and ended up as a 5% rate with no earmarking of the tax proceeds at all for a period of nearly seven years.

So the proceeds flowed to the general fund where lawmakers spent those TAT dollars on every conceivable wish list presented to them by their constituents. But they couldn’t spend it fast enough to the point where the general fund surplus grew to more than half a billion dollars. While they gave some of that surplus back in refund tax credits, they hid most of those monies in newly created special funds or earmarked a portion of the general excise tax to go for school repairs and maintenance.

The problem with the latter effort which designated $90 million to be earmarked was the state bureaucracy could not spend that much in any one year, and that fund began to bulge with excess funds. And when hard times hit in the mid 1990’s, they took back the earmarking of the general excise tax revenues.

Through the difficult years of the 1990’s, lawmakers kept many of those nonessential programs alive by tapping into the funds they had hidden in special funds or as the health department is now doing, created and raised user fees to fund those programs.

And let’s not forget that the unfunded liabilities of the state retirement system and employee health fund can be traced directly to the fact that lawmakers scooped the earnings from the retirement system over and above the 8% threshold that they were allowed to do by a law that they themselves had adopted. More than likely, if those excess funds had remained in the fund and been reinvested, the fund would not be in the pickle it is in today.

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