Budget Drama Continues  

by Tom Yamachika, President Tax Foundation Hawaii

For the 2024 legislative session, the governor has just released his intent to veto list.  That means bills not on the list are going to become law, with or without his signature, in the beginning of July.

For the most part, bills affecting taxation or public finance did not make the list. There were, however, two notable exceptions: HB 1800, which is the state’s budget bill, and HB 40, which is the bill that puts $300 million into our rainy day fund and $135 million into the pension accumulation fund.  As you may recall, the Hawaii Constitution requires that some money be either refunded to taxpayers, put into the rainy-day fund, or put toward state retiree benefits, if our general fund balance is more than 5% of general fund revenues for two fiscal years in a row.  The financial target was met this year, but the Hawaii Constitution does not tell us how much money is to be sequestered.  (Indeed, before the constitution was amended in 2010 to allow for rainy day or pension fund transfers, our legislators were having fun complying with this provision by giving taxpayers a $1 general income tax credit for many years.)

Giving notice of veto of these bills, however, doesn’t mean that we will be completely in chaos mode for budgeting purposes or that we will be noncompliant with the Constitution of Hawaii.  What it does mean is that the governor will be able to reduce or eliminate some of the appropriations contained within those, and perhaps other, bills. This is known as “line-item veto” authority.

In other words, the budget drama continues.

Before July 10, the Governor has to come up with all of his line-item vetoes (or any other vetoes) and must make them known to the Legislature.  At that point, the Legislature will decide whether to call itself into special session to do some veto overrides.

As a practical matter, however, negotiations are now under way between the Fifth Floor and legislative leaders about where the Governor’s line-item veto axe is going to fall. 

The outline of the Governor’s grand plan is contained in a press release issued on June 21:  “This veto list reflects our need to prioritize Hawaiʻi’s crippling high cost of living, the state’s affordable housing crisis and Hawaiʻi’s families impacted by the Maui wildfires,” Governor Green is quoted as saying. “In doing so, I intend to veto, line-item veto, or make appropriation reductions on several bills in order to maintain a balanced budget, but more importantly, to achieve a healthy carryover balance of more than $300 million at the end of next fiscal year.  After enacting the largest income tax break in our state’s history, strategic decisions were necessary to ensure we had a balanced budget.”

Specifically relating to HB 40, the press release noted that the rainy-day fund is now more than $1.5 billion and “is the largest it has ever been.”  Back in 1998, my predecessor Lowell Kalapa wrote about the proper use of the rainy-day fund: 

The concept of a “rainy day” fund is to set aside moneys when times are good for the state that then can only be used when there are insufficient funds to insure the health, safety, and welfare of the community. A good “rainy day” fund would require that a super majority of the legislature be required to approve any expenditures from the fund. A good “rainy day” fund would be capped at a certain level to insure that it doesn’t just become a slush fund to store surplus funds. This cap can be set as a percentage of general fund receipts so that the absolute number of dollars will be allowed to grow as the economy that produces those revenues grows.

And, of course, the need to be vigilant against various “slush funds” remains.  We wrote last year about one fund with more than $180 million in it that is now pretty much doing nothing. 

Let’s see if the Governor and legislative leaders can agree upon a soft landing for our budget that will allow for the enacted tax cuts, take several steps toward right-sizing our government, and minimizing “slush funds” that hoard taxpayers’ hard-earned dollars without a clear and justifiable purpose.