by Andrew Walden
The use of capital improvement bonds to finance operating expenses is generally a sign of intense financial distress. Bond rating agencies look down on the practice and often will lower a state’s bond rating—increasing the cost of borrowing—when a State or County is forced to borrow just to meet payroll. But that is effectively what Governor Abercrombie and potential House Finance Chair Marcus Oshiro have come up with--a $100M per year scheme to divert bond funds into the General Fund disguised as a repeal of the subcontractor exemption from the General Excise Tax.
KITV’s Daryl Huff January 3 explains how the scam will work:
Most construction projects involve general contractors who hire subcontractors. Under the current subcontractor tax exemption, a general contractor on a $1 million job who subcontracts half the work pays half the excise tax, about $20,000, and the subcontractors pay the other half, The total tax generated is $40,000, or 4 percent of the million-dollar contract.
Removing the exemption would mean the general contractor would pay a full 4 percent, $40,000 on the entire million dollar job, and the subcontractor would also pay four percent on his $500,000 portion of the work. In the end, the contractors together would pay $60,000 in excise taxes -- a 50 percent increase.
A $5B rail project, $2B sewage treatment project, $2B big wind and undersea transmission cables project, and over a billion dollars of miscellaneous capital improvement spending are on the horizon. Many subcontractors in turn hire their own subcontractors who would also have to pay the full 4%. The double or even triple taxation of subcontracting and sub-subcontracting could divert an additional $200M to $800M into the General Fund over several years. KITV continues:
State Tax Director Fred Pablo said the governor's only promise is that he will not raise the 4 percent excise tax rate. “We will not touch that at all,” Pablo said. "But everything else we'll be taking a fresh look at it.”
The House Finance Committee has estimated more than a $100 million a year could be generated by repealing the subcontractor exemption.
But that revenue increase could be more than offset by higher debt service payments if bond rating agencies recognize the scheme for what it is and cut Hawaii’s bond ratings.
Because the 2% to 8% increase in costs will be passed onto the State and the County in the form of higher bids by all by contractors, the removal of the tax exemption will directly result in higher construction costs. A substantial portion of those costs will be paid with capital improvement bonds—meaning that bond moneys are being secretly diverted to cover operating expenses.
The double or triple taxation of construction projects will also make affordable housing that much more difficult to build, adding $4,000 to $16,000 to the cost of a $200,000 home or condo—but hey, when the Mandarins of the corporatist State are dreaming and scheming the little guy just has to step aside—or move to Vegas.
The Hawaii State Constitution does not expressly forbid so-called “deficit borrowing” schemes, but Article 7, Section 13 visualizes only the most extreme circumstances such as:
“…bonds issued by or on behalf of the State to suppress insurrection, to repel invasion, to defend the State in war or to meet emergencies caused by disaster or act of God.”
The akamai reader will note that “borrowed too much”, “gave away $700M to Act 221 scammers”, “decided to build a train to nowhere”, “refused to audit the DoE”, “padded the payroll to keep HGEA/UPW/HSTA/UHPA bosses happy”, and “quietly gave away $126M to government employee unions without even negotiating” were not mentioned in the Constitution as acceptable reasons for deficit borrowing. But that’s not a problem--as long as the bond rating agencies don’t notice.
KITV: Lawmakers Look For New Tax Income: Construction, Other Industries May Lose Tax Breaks
REUTERS: Deficit borrowing to rise for states, cities
NY Daily News: Borrow our way out of debt? Plan that rescued city in '70s can save state, Ravitch says