Independence Means…Freedom from Special Funds

by Tom Yamachika, President Tax Foundation Hawaii

Special funding is one of the complications of public finance in Hawaii that we at the Foundation have pointed out over the years. Special funds are pots of money that exist for a specific purpose, and largely bypass the legislative appropriation process, as well as some constitutional provisions like the general fund expenditure ceiling. As a corollary, these funds need to be fed, but the funding mechanism may not necessarily meld with the purpose of the fund.

Take the cigarette tax, for example. The tobacco tax on each cigarette is 16 cents. Of this amount, 2 cents goes to the Hawaii cancer research special fund, 1.5 cents goes to the trauma system special fund, 1.25 cents goes to the community health centers special fund, and 1.25 cents goes to the emergency medical services special fund. All of these important public health services are being funded by the tobacco tax.

But consider the purposes of the tobacco tax. Over the years, the Department of Health, as well as smoking cessation advocates, have argued that cigarette taxes make it more and more expensive to smoke and it will discourage current smokers from continuing to smoke as well as youth from ever starting to smoke. The tax is justified, they say, because smokers increase the cost of health care to society so they should be asked to pay for the increased costs.

So if the tobacco tax does what it is designed to do, namely discourage smoking, then the amount of revenue taken in by the tax is supposed to go down, not up, over time.

Governor Ige has just signed Senate Bill 1030, which raises the legal smoking age to 21. This law further advances the social policy, but it has fiscal ramifications as well – because of the linkage that the special funding provides.

With the smoking age raised to 21, revenue from the tobacco tax is going to take a hit. One estimate I have seen is that the drop in revenue is likely to be around $5.5 million.

One eighth of the tobacco tax on each cigarette goes to the Hawaii cancer research special fund. So if the $5.5 million dollar revenue drop is solely attributable to cigarettes, the impact to the cancer research special fund would be close to $700,000.

According to the April 2015 Kaka’ako Campus Business Plan Proposal from the John A. Burns School of Medicine, the School and its Cancer Center are in imminent danger of losing key credentials. The report says that they need around $14 million for additional faculty salaries, or, “in fiscal year 2017, the School will lose its medical school accreditation and the Center will lose its National Cancer Institute (NCI) designation.” The School and Center now receive about $14.7 million annually in tobacco tax special funds and are budgeting for that special funding to decline by 2% annually – which translates to $300,000 per year. This new Act is going to make the financial problem worse. Again, this financial problem has nothing to do with social policy and more to do with how the School and Center were set up to be funded.

If the special funds and the tobacco tax weren’t at odds with each other, we wouldn’t be finding ourselves in this fiscal pickle. We don’t expect to close either the School or the Center any time soon, so lawmakers will have to make up the revenue somehow. So hold on tight to your wallets because legislators will be prowling the halls in search of money.

Again, this problem would not exist if the School and Cancer Center were not dependent upon special funds. Let’s work toward independence and prevent issues such as these.

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