Commentaries of the past few weeks have generated a number of responses and inquiries from readers that will take several weeks to address, but before readers explore some of the more detailed strategies that lawmakers are considering this year, it appears imperative that readers have a much better understanding of the back drop against which this year’s drama will take place.

Questions have ranged from the productivity of the general excise tax and how it differs from the retail sales tax found on the mainland to why special funds and earmarked revenues are not good public finance policy. These issues will be revisited in the coming weeks, so if one has had a question in these areas, come back to learn more about them.

One of the very basic questions posed by readers is what is the Council on Revenues and why has it played such an important role in this year’s fiscal crisis? The Council on Revenues is mandated by the state constitution and was added by the 1978 Constitutional Convention in reaction to the budget antics of the 1970’s when the state administration and the two houses of the legislature would each arrive at their own forecast of anticipated tax revenues and then base their budgets on their respective “finger-in-the-wind” outlook.

As a result, by the time the biennial budget made its way through the legislative process and up to the governor’s desk, the amount of the appropriations grew with each subsequent draft as optimism grew over the outlook for state tax revenues.

By the time the budget got to the governor’s desk, it was substantially larger than the budget the administration had submitted at the beginning of the legislative session. Since that budget was the product of projections made by the administration under the guidance of what was known as the State Revenue Estimating Committee, the governor released funds based on those earlier estimates and not on those forecasted by each house of the legislature.

As would be expected, accusations flew back and forth as each branch of government bickered over whose revenue forecast was correct, but ultimately since the administration executed the spending plan, it was the administration that had the last say.

This led to the establishment of the Council on Revenues where the Council was established as an independent body of seven members with both the administration and each house of the legislature appointing a select number of members of the Council. The Council is required to review, establish or revise estimates of revenues four times during the year, with each reporting date being made at key junctures in the budget process.

What is even more critical is the law requires each branch of government, in submitting their proposal to establish the state general fund spending plan, to adhere to the revenue forecasts made by the Council on Revenues. Either the administration or the legislature can elect to exceed the forecasts made by the Council, but such an action would require a public declaration and reasons must be provided as to why a different forecast is being used.

Therefore, in one sense, the Council on Revenue wields a lot of power because its projections of revenues form the basis for legislative appropriations as well as for the release of funds once the budget has been adopted by the legislature and approved by the governor. When times are good and revenues are rising, few, if any, pay attention to the Council on Revenues as tax revenues seem to outpace the Council’s forecasts on the upswing, but that is certainly not the case as revenues erode. Each meeting of the Council is awaited with bated breath and is watched with cautious fears as revenues decline.

In the past 18 to 24 months, as the national and global economies have taken a hit, the Council has been slow to accommodate the impact of the downturn in the economy. As a result, as revenues slid more rapidly than the Council’s forecasts, lawmakers and administration officials found themselves with a huge hole in the state budget and suddenly realized there wasn’t enough money to keep the state operating at the same level or to pay its bills.

In recent hearings, the Council was chastised by lawmakers for not having more accurate forecasts of revenues. Unfortunately, in a world where economic dislocations are beyond the control of the Council, lawmakers must do what every other household in this state has done, that is tighten the proverbial belt.

‘Lowell Kalapa is president of the Tax Foundation of Hawai

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