This week, we are continuing our coverage of creative tax-related bills at our legislature.  The Hawaii State Tax Watch Doggie is taking a nap at the moment so I’ll continue without him.

Let’s start with the revenue raisers.

SB 1373 raises the GET rate.  At least that one is straightforward and easy to understand.  SB 1474 raises the GET rate a little more, but this would fund the DOE and the University of Hawaii.  How much are the rate increases?  0.3% and 0.5%, respectively, but if the bills move the number probably will be amended.  Next!

HB 1459/SB 1463 enacts a carbon tax, which we have written about before here and here, and replaces the current fuel tax and the barrel tax.  HB 1287 and HB 1579 just enact a carbon tax, leaving the other taxes on fuel in place, although HB 1287 says that half of the tax is to be refunded to taxpayers through the income tax system.

SB 1114 requires a tax clearance to be obtained before getting or renewing any professional or vocational license in Hawaii.  Given that we require licenses for more vocations and occupations than many other states (and are the most burdensome to licensees), coverage would be broad.  But it would create minimal benefit in exchange for the extra time and paperwork for the law-abiding citizens, who we hope are most licensees.

SB 1361 increases the estate tax for taxable estates over $10 million.  At least that’s what it says now.

SB 1362 increases the conveyance tax for the sale of homes over $2 million.  Gone forever are the days it was just 0.05% of the sale price (5 cents per $100 of value).

And then let’s not forget tax credits.  Many lawmakers are sponsoring credits to encourage desirable social behavior—I think.

HB 1215 awards a tax credit for people who live within 10 miles of their working place.  I have my doubts about that one.  People already have lots of motivation to live close to work.  (It’s called “traffic.”)  If anything, those of us who are forced by land prices to live out in the ‘burbs need relief from the punishing fuel taxes that need to be paid to keep the ol’ jalopy chugging along.

HB 1216 awards a credit for people who run a business out of their own home.  What’s the philosophy behind this one?  Is it that people who run such a business must be impoverished because they can’t even afford to rent a proper office?  I suppose small businesses need all the help they can get but drawing the line in this way is just odd.

SB 1473 establishes a food expenditure tax credit.  The bill says the credit is based on adjusted gross income, but there is no table or schedule to tell us what the amount of the credit would be.  There is also language defining qualified food expenditures—the cost of food and dietary supplements count, prepared food and alcoholic beverages don’t count, anything coming out of a vending machine doesn’t count, and tobacco products don’t count.  At present the credit doesn’t seem to depend on the amount of qualified food expenditures, so why define the term?  If the answer is that individuals are supposed to keep track of their own food expenditures and then submit a credit claim after a year, I wonder if it’s realistic to expect any taxpayer to do that while following all the rules correctly.

Good luck to all of us—no one’s safe when our Legislature is in session!!

This year, our legislature once again is poised to consider revenue raising – namely, taxes in new and creative ways.  For a different perspective on the issue, we’re asking the Hawaii State Tax Watch Doggie, who has been going through the hundreds of introduced bills.

Q:        So do you see any new and unusual revenue raisers there?

A:        Woof!  Arf!  Yap!

Q:        Use the keyboard.

A:        SB 395 would charge conveyance taxes on leases shorter than five years.

Q:        Conveyance tax, the tax paid on real estate sales?  But if the real estate is being rented, what’s the tax going to be paid on?

A:        It’s on the present value of the lease payment stream.

Q:        That couldn’t be much.  What would be the tax on a one-year lease where the rent is $1,000 a month?

A:        $17.43.

Q:        Maybe you can get one bag of dog food for that.

A:        Then there’s HB 646, which would charge a certain dollar amount per person per day on a business providing live adult entertainment.

Q:        How much is the tax?

A:        The amount is blank now.

Q:        How are they going to enforce it?  Will they need to send people to the establishment to count the patrons?

A:        I’ll volunteer!  I, um, am curious about what kind of people go there.

Q:        Not sure that’ll work.  You need to be 18 years old to go in, and you’re only seven.

A:        Bummer.

Well then, there’s HB 231, which is entitled “Tax Fairness.”

Q:        That’s scary.

A:        It increases various credits given to low-income taxpayers and pays for them by raising income tax rates.  The top tax rate would become 13%.

Q:        Didn’t the income tax rates just go up?

A:        Yes, they went up to 11% last year because of a bill passed in 2017.  Guess they’re itching to be top dog in state tax rates!

Here’s another one.  SB 112 wants the counties to authorize construction of new housing units.  It specifies new housing unit targets for each county.

Q:        And what happens if a county misses its target?

A:        Then its share of transient accommodation tax money is reduced by $1.03 million.

Q:        Ouch!

A:        But it can get the money back if it makes its goal the following fiscal year!

And then, there’s SB 382.  It would raise the transient accommodations tax on time share units.

Q:        By how much would the tax go up?

A:        I don’t know.  The amount is blank now.

Q:        So how do you know that the tax is going to be increased?

A:        Because the first part of the bill says, “the existing tax formula for time shares significantly underestimates the fair market value … and therefore often fails to assess taxes at a fair and proper rate.”

Q:        Oh.

A:        Wish us luck following the legislature this year!  Woof!

Recently, we have heard the term “congestion pricing” bandied about as a way of improving traffic congestion here, and of raising more money.

What is it?  Congestion pricing is a way of charging motorists for driving in designated areas during designated times.  For example, in London, drivers pay a daily fee of about $16 to drive to the heart of the city on weekdays between 7 a.m. and 6 p.m.  According to the British online magazine CityMetric, the number of private cars entering the protected zone dropped by 39%.

“It absolutely works,” Mayor Caldwell is quoted as saying.  But: “It’s fraught with political problems.”

Even if the political problems could be overcome, how would it work?

Would the City – or State – set up toll booths on the H-1, for example?  It’s possible, with current technology, to set up devices at onramps to check in cars, either through license plate number recognition software or through transponders.  The owners of those cars then receive a bill every so often.

There are some wrinkles, however.  The first is that the H-1 is part of the federal Interstate Highway System (although the word “Interstate” means “between states” and our freeways obviously aren’t).  Which means federal law dictates whether states or cities can charge a toll for accessing the freeway.  The 1956 National Interstate and Defense Highways Act generally prohibits state and local governments from charging tolls on interstate highways.  However, there have been some exceptions to this rule, and President Trump has proposed scrapping the restriction altogether.

The second wrinkle is that the City and County of Honolulu, which wants to impose the tolls, doesn’t have independent taxing power.  It would need to get that power from our state legislature, and there is some question as to whether that could realistically happen.  The counties do have, under existing state law, the power to charge a toll on county highways, provided that all toll revenues received are used to construct or maintain county highways (HRS sec. 46-1.5(19)(D)).  Given that law, it is doubtful that the counties have the power to charge tolls to use roads owned by the state or federal government, or any roads other than county highways for that matter.  So, the legality of congestion pricing might be questionable unless state law is changed to permit it.

Finally, there are the political problems the Mayor referred to.  In 2008, for example, then-Mayor Mufi Hannemann said that congestion pricing couldn’t be done without providing “enough options or opportunities for people to travel in and out of the city.”  The American Trucking Association came out strongly against President Trump’s move to allow states to toll the interstate highways, saying that tolls are ineffective and wasteful and spend too much on overhead costs.  Then there is the issue of how fair a toll would be on an ordinary taxpayer who is struggling to make ends meet and needs to get to work somehow.  And finally, we always worry about new taxes and fees because sometimes they take on a life of their own and balloon out of proportion to the need that spawned them.

The debate will continue!

In a budget briefing at the legislature at about this time last year, Department of Education officials reported that their backlog of repair and maintenance jobs was $293 million, and they were patting themselves on the back because it was a significant drop from the $392 million reported in 2010.

This year, the backlog is $868 million – nearly triple the amount reported last year.  It turns out there were issues with the way the backlog projects were tracked.  For example, when initial design money was spent on a project, the project dropped off the pending list even though no contractor to fix the issue had been hired or paid.

The words “gross incompetence” come to mind.  In the private sector, this would normally be coupled with “heads will roll.”

In our state government, however, it is notoriously tough to get someone fired.  The only event in recent memory to trigger a shake-up was the infamous ballistic missile false alarm, which resulted in the resignation of an administrator and a co-worker, the suspension of another, and the firing of the button-pusher.

What, then, is to become of those who designed and ran the systems that were supposed to be keeping track of the DOE’s maintenance backlog?  The false missile alert happened in the blink of an eye and was over in 38 minutes.  There was a lot more time put into compiling the DOE maintenance backlog data.  There had to have been multiple levels of review when the DOE data was gathered, the numbers were crunched, and all the above was refined into a report or briefing materials presented to the legislature.  And the result of all of this was a hideous lie told to our lawmakers.

On the flip side, lawmakers had to have known that something wasn’t right.  The University of Hawaii was reporting a deferred maintenance backlog of $722 million – but it has 10 campuses and the DOE has 256.  Was UH that much more inefficient than the DOE (and if so, why hadn’t there been heads rolling at the UH)?

Whatever the reasons, a maintenance backlog growing closer to the $1 billion mark at both the DOE and UH is cause for serious concern.  Tough decisions about funding priorities need to be made, and by the people who need to have the state’s big picture in mind.

And when I speak of “big picture,” I am not at all talking about lawmakers who simply say, “Oh, we don’t have enough money to run government, so we need to ask the taxpayers to make up the difference.”  The big picture leaders need to have an understanding about the revenues as well as the expenses, so they can manage the economic engines that produce the money that we all need to get on with our lives.

In the Star-Advertiser article that reported on this amazing revelation, it was mentioned that the DOE has built a new online database that will encompass all capital improvement and repair projects so errors like this won’t happen in the future and there will be more transparency.  “People will have the ability to pull that information anytime,” an assistant superintendent is quoted as saying, but what he meant by “people” is legislators, Board of Education members, or school administrators.  A “public version” of the database will be developed next year – probably with limited functionality.  The folks who came up with that idea can’t even see that part of the big picture that says We the People are responsible for their paychecks and the funds necessary to get these projects addressed.  Maybe they should be considered for head-rolling along with the geniuses responsible for underreporting the maintenance backlog in the first place.

Last week, we spent some time on “variance reports,” which is how our state government agencies report differences in position count and spending from one year to the next.  The agencies are also supposed to report on performance measures that they pick themselves, but sometimes still disregard this requirement.

Today, we examine “zero-based budgeting,” an idea that has been around for a while but was recently championed by House Finance Chair Sylvia Luke.

Zero-based budgeting assumes that nothing, not even the amount the legislature approved the previous year, is approved.  Agencies will have to justify everything, all the dollars they want to spend and all the positions they want to have, from the bottom up.

This is a whole lot more work than agencies are used to doing, and it generates a lot more information than legislative staffs are used to reviewing during our compressed legislative session, so it’s going to be a tough sell all around – especially for people who don’t understand what ZBB is.

The international consulting firm McKinsey & Co. defines ZBB as something that goes beyond simply coming up with a budget:

Zero-based budgeting is a repeatable process that organizations use to rigorously review every dollar in the annual budget, manage financial performance on a monthly basis, and build a culture of cost management among all employees.  A world-class ZBB process is based on developing deep visibility into cost drivers and using that visibility to set aggressive yet credible budget targets.  The annual budgeting process does in fact start from zero and is very detailed, structured, and interactive in order to facilitate meaningful financial debate among managers and executives.  Throughout the year, multiple owners are tasked with managing performance and continuing the healthy debate on cost management.  Through new system and process controls, and aligned incentive programs, all employees make cost management a part of their daily routine.

One of the key elements of ZBB is visibility.  An organization needs to understand what money is being spent on, and why.  In government agencies, especially larger ones, it’s difficult to obtain that understanding.  Waste and fraud can be buried, not only because of some evil intent but simply because “it’s always been done that way.”  It takes work to figure out why a task or process is being done, and only then can it be analyzed to determine if it can be done more efficiently or even if it is needed at all.

Nevertheless, it’s probably worthwhile to periodically take deep dives into an agency’s activities.  Advantages of the process include sharpening the agency’s focus on its mission so marginally related activities can be identified and possibly refocused, identifying redundant activities, identifying artificial budget inflation, and increasing the efficiency of resource allocation.  Doing things a certain way just because they’ve always been done that way might not be right when the times have changed and the agency’s priorities and needs have changed.

Yes, it takes leadership and hard work to do ZBB correctly.  But if it is done correctly, the potential for savings to the public fisc is huge.  McKinsey estimates that if properly implemented, ZBB can reduce sales, general, and administrative costs “by 10 to 25 percent, often within as little as six months.”  We can’t afford not to try this.

Although our legislature hasn’t opened yet, legislators are at work already.  The money committees, for example, have started quizzing the various executive departments on their budget requests for the upcoming biennium (2019-2020).

According to law, specifically HRS section 37-75, the agencies are supposed to come up with a “variance report” that is supposed to list how much they were budgeted, how much was spent, and a narrative explanation for any significant difference.  Variance reports are due 30 days before the start of the legislative session.  They are posted here.

The variance is supposed to be reported not only for dollars, but also for employee count and other “effectiveness measures.”  Effectiveness measures are numeric indicators of how well the agency is performing in a certain program area.  The agency gets to select their own measures to report how well they are doing to the legislators and to us as taxpayers.

Let’s take a look at Honolulu International Airport from this report.  We spent $158 million on this airport in FY 2017-18.  Regarding measures of effectiveness:

Hmm.  Kind of tough to figure out how they’re doing when there’s no data.  By the way, none of the airports appear to have any actual data in their measures of effectiveness sections.  If they are selecting their own measures of effectiveness, why aren’t they even measuring them?  And by the way, variance reports in prior years did measure these statistics – up to 2013-14.  No data was collected in the 2014-15 variance report or in any year since.  The 2014-15 variance report noted, “DOT’s response dated November 17, 2014 indicates the Airports Division reviewed their measures two (2) years ago and detected that many of its measures are no longer relevant and outdated.  As noted by Airports, to date, the updated measures and data collection are not available.”  Which basically meant that the Airports Division quit following the law at that time.

Another statistic that is high on the head-scratching factor is for Halawa Correctional Facility.  We spent $28 million on that facility this year.  Two of the measures of effectiveness are the number of times an inmate escapes by using violence (first degree escape) and the number of times an inmate escapes otherwise (second degree escape).  The variance report claims to have no data on these statistics.  Huh??  Do they mean that they don’t know when people who are supposed to be locked up aren’t?  Strike that – I don’t even want to know the answer to that question.

Other holes in the variance report drew excuses like “We no longer track this because federal grants no longer require it” or “We don’t keep the data in this way any more.”  In the private and nonprofit sectors, if a metric is no longer meaningful, it’s common to switch to another one that is.  How long does it take for one of our Hawaii departments to switch metrics on these reports?  Please don’t tell me it takes years.

For our government to operate well and to be fairly evaluated, we need good data and transparency.  Let’s keep pressing, and maybe someday we will get some.