In recent years, when money became tight because of the slow down in the national and state economies, representatives of certain groups pushed lawmakers to allow taxpayers to designate a portion of their state tax refund to support their efforts. Among these causes were the Hawaii Children’s Trust Fund, the domestic violence and sexual assault special fund, the spouse and child abuse special account under the department of human services, and the spouse and child abuse special account under the judiciary.
This mechanism to designate a portion of a refund is known as a tax check-off and is inserted on the state income tax return after the net income tax is computed and measured against what the taxpayer had withheld or paid in estimated taxes. Before the taxpayer asks for a return of his refund, he may check a box to help fund a specified cause.
While this might sound like a great idea for taxpayers who want to support a certain program, it costs all taxpayers something, as someone in the tax department or the department of accounting and general services must keep track of those funds. The check-off is also an indication that taxpayers don’t believe lawmakers are capable of setting funding priorities.
A survey by the Federation of Tax Administrators found states that utilize check-off programs have been experiencing a decline in the amount designated though the mechanism. The survey also found that because of administrative costs associated with the system, states that use it are looking to adopt expiration clauses and other means to remove the less productive check-offs.
Lawmakers view check-offs as absolution of their responsibility to deal with problems by turning the response directly over to the taxpayer. However, in the long run, the cost of administering the check-off merely siphons resources that should be used to provide public services.
Inasmuch as these funds are designated for a specific program or cause, special funds must be created to retain these funds for the specific program. As a result, the cost of administering those special funds must be borne by all taxpayers as the cost of administration is usually not charged against the special fund. While programs benefit from supporters’ designations, all taxpayers pick up the tab for administrative costs.
If lawmakers believe earmarking funds through a check-off system is appropriate, they might consider placing all programs on the state income tax form for designation. They could then repeal the legislative body, as there would be no reason for Legislature to exist if all decisions were made directly by the taxpayers.
If lawmakers believe certain programs are of great importance, they can prioritize them through the appropriations process. With the Hawaii tax burden already so heavy, why should taxpayers turn any more of their hard-earned dollars over to government? What lawmakers also do not recognize is that by creating these check-offs, they add to the cost of administering the law, a cost which steals funds from other programs including those enumerated for a check-off designation. To the extent that the state is made the “donation” collector, every other worthy cause should be insulted that all taxpayers and programs are subsidizing the fundraising efforts of these specified few.
Tempting as it may be for supporters of specific programs or causes, all taxpayers should be alarmed that a small group of very vocal advocates should force all taxpayers to pay for programs that cannot solicit enough support to secure sufficient funding from the general fund. Instead of creating more check-off designations, lawmakers should repeal those check-off boxes as they are an insult to all taxpayers.
Lowell L. Kalapa is president of the Tax Foundation of Hawaii.