Placing Check-off Designations on Tax Form Paid for by All Taxpayers

by Lowell L. Kalapa, Tax Foundation of Hawaii

In recent years when money became tight because of the slow down in the national and state economies, enthusiastic supporters of some very specific causes pushed lawmakers to allow taxpayers to designate a portion of their state tax refund for their specific cause. Among these were the Hawaii children’s trust fund, the domestic violence and sexual assault special fund, the spouse and child abuse special account under the department of human services, and the spouse and child abuse special account under the judiciary.

This mechanism to designate a portion of the taxpayer’s refund is known as a tax check-off and is inserted on the state income tax return just after the net income tax is computed and measured against what the taxpayer had either withheld from his paycheck or paid in estimated taxes. So before the taxpayer can ask for a return of his refund, the taxpayer can check one, or all, of the boxes to have a portion of that refund designated for one of these causes.

While this might sound like a great idea for taxpayers who want to support a certain program or cause, it does cost all taxpayers something as someone in the tax department or the department of accounting and general services has to keep track of those funds. The tax check-off is also an indication that taxpayers don’t believe that lawmakers are able to set priorities for taxpayer funds.

A survey by the Federation of Tax Administrators found that the states that utilize check-off programs have been experiencing a decline in the amount of moneys designated though the check-off mechanism. The survey also found that due to the administrative costs associated with the check-off programs, states that currently have the check-offs are looking to adopt expiration clauses and other means to remove the less productive check-offs.

Lawmakers seem to view such check-offs as absolution of their responsibility to deal with such problems by turning the response directly over to the taxpayer. However, in the long run, the cost of administering the check-off merely siphons resources that should otherwise be used for providing needed public services.

Inasmuch as these funds are designated for a specific program or cause, special funds must be created to retain these funds for the specific program. As a result, the cost of administering those special funds must be borne by all taxpayers as the cost of administration is usually not charged against the special fund. Thus, while the program will benefit from the amounts designated by supporters, all taxpayers are asked to pick up the tab for the administration of the refunds and the special funds.

If lawmakers believe that earmarking funds through a check-off system is appropriate, then they might consider placing all programs on the state income tax form for designation and then repealing the legislative body as there will be no reason for the legislature to exist because decisions will have been made by the income taxpayer. And that is the whole point of an elected legislative body; they are elected to set policy and priorities for the funds given them by taxpayers. If those elected officials believe that they should allow taxpayers to designate funds for a specific program or cause, then perhaps taxpayers don’t need that elected body of lawmakers.

If lawmakers believe certain programs are of great importance, then they can prioritize those programs through the appropriations process. With the Hawaii tax burden already so heavy, why should taxpayers turn any more of their hard-earned dollars over to government? What lawmakers also do not recognize is that by creating these check-offs, they add to the cost of administering the law, a cost which steals funds from other programs including those enumerated for a check-off designation. To the extent that the state is made the “donation” collector of these funds, every other worthy cause should be insulted that all taxpayers and programs are subsidizing the fundraising efforts of these specific causes.

Tempting as it may be for supporters of specific programs or causes, all taxpayers should be alarmed that a small group of very vocal advocates should force all taxpayers to pay for programs that cannot solicit enough support to secure sufficient funding out of the general fund pot. Instead of creating more check-off designations, lawmakers should repeal those check-off boxes as they are an insult to all taxpayers.

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