by Andrew Walden

The Hawaii Department of Taxation is seeking an outside auditing firm to look at "systemic problems" with DoTax tax revenue reports.  This marks a sudden turnaround for the Department which just last month was praised by Governor Abercrombie for “identifying improvements” and implementing “better business accounting procedures” – leading to the discovery of an additional $134M in tax revenues in the DoTax April, 2011 Tax Revenue report.   

After using an alleged “crisis” and so-called “budget shortfalls” to push tax increases through the Legislature, the end-of-session discovery of $134M certainly seemed like convenient timing.

The chain of events started with a brief announcement May 11 from the Governor’s office:

The Hawai‘i Department of Taxation today released its preliminary statement of state general fund tax revenues for April 2011 totaling $490,075,000. This is an increase of $134,068,000 over the March 2011 general fund revenue report. Governor Neil Abercrombie released the following statement:

“The April 2011 revenue numbers are promising and are, in part, a result of better business accounting procedures instituted by the Tax Department. Under the leadership of Director Fred Pablo, the Tax Department has been identifying improvements and changing old policies and practices to get government working again.”

Naturally we at Hawai`i Free Press put a few questions to Pablo:

• What are the “better business accounting procedures” which contributed to this sharp increase in tax collections?
• When were these new procedures implemented?
• Do these policies give a one-time boost on collections or are they likely to result in higher tax collections on an ongoing basis?
• Is there anything else you would like to tell my readers about how Tax Department procedures affect the month-to-month general fund tax revenues?

Certainly Mr Pablo would be proud of the improvements in “business accounting procedures” which helped the General Fund to rake in an additional $134M.  If this amount were to come in every month for a year, the total would be $1.6B which would more than cover the budget shortfall-without any increase in taxes.

But DoTax never responded to our request.  Instead, the answer seems to have come in a DoTax news release sent out Friday.  Not available on the DoTax website, and not sent to Hawai`i Free Press, the only report of the news release comes in an article on Civil Beat Saturday morning. 

According to the article, in addition to “systemic problems”, Pablo says he has found “unusual reporting” and “several inconsistencies” in the DoTax Tax Revenue Reports.

This is significant because DoTax reports of low tax receipts for February were cited as a key element of the decision by the Council on Revenues to lower its forecasts of General Fund revenues at its March 29 meeting. 

AP reported March 30:

A loss of Japanese tourists and declining tax collections have sunk Hawaii's budget hole Tuesday to the depths of a $1.3 billion shortfall over the next two years, leaving lawmakers searching for ways raise money and cut spending. … The council's new estimates add $312 million to its previous prediction of a nearly $1 billion shortfall through June 2013….

Besides the tsunami, lower-than-expected tax income during February also contributed to the worsening outlook.

The effect of the tsunami "turns out is kind of smallish in its consequences," said Paul Brewbaker, an economist who chairs the Council on Revenues. "The biggest factor at the end of the discussion was the surprisingly low February collections."

The Legislature is legally required to use the CoR revenue projections in order to calculate a balanced budget.  Lower CoR projections require greater spending cuts and/or tax hikes. 

It certainly is “convenient” to suddenly find $134M after the legislature has raised taxes because of a CoR projection based largely on low tax revenues.  The cynic might also now want to know whether these suddenly discovered “unusual reporting, systemic problems, and inconsistencies” are now to be blamed for an “error” which coincidentally caused “surprisingly low February collections” as well as the sudden discovery of $134M in the April collection report.

According to Civil Beat: “The department has put out a formal request, asking auditing firms to submit a letter of interest. These letters are due by June 13 and the department expects an audit to be done by mid-August.”

---30---

March 30:  CoR: Tsunami effect smallish, Weak February tax receipts major factor

May 22: DoTax still has no explanation for sudden discovery of $134M