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Pay cut better than
no paycheck at all
By Lowell L. Kalapa-Special to The Garden Island
The earlier commentary on the furloughs for public employees elicited responses from both sides of the aisle depending, of course, on whether or not the author was a public employee or an employee or business in the private sector.
What those responses did reflect was a lack of understanding of the reality of the financial situation faced by the state and differences between public and private sector employment. Perhaps it is incumbent that a little time is spent on these two issues to clarify the limited alternatives available and the consequences of those alternatives.
Let’s take the financial situation first. Funding for state government comes from a variety of sources, the most obvious of which are taxes levied by state government including the ubiquitous general excise tax often called the state’s sales tax. The other obvious state tax is the net income tax on individuals as we see it deducted from our wages and salaries before we get our take-home pay. Not so obvious taxes include the taxes on businesses such as the net income tax, the bank franchise tax, the public service company tax on public utilities, and the specific excise taxes on alcoholic beverages and cigarettes because those taxes are buried in the price of those specific products.
While most of the proceeds from state taxes go into the state general fund, there are some taxes that are earmarked for specific purposes and, therefore, go into what are called special funds. These include the state vehicle taxes like the gasoline tax, motor vehicle weight tax and vehicle registration fees. The transient accommodations tax or hotel room tax is earmarked for visitor promotion and other visitor related programs and underwrites the grants-in-aid program for the counties. Some of the proceeds also go into the state general fund. Another earmarked tax is the conveyance tax which funds the affordable housing trust fund and the natural area reserve program of the state Department of Land and Natural Resources and more recently the Legacy Lands fund.
But the general fund is really at the heart of the problem as it represents nearly half of the total state budget or about $5.4 billion of spending for each year of the fiscal biennium. While there are other resources for the general fund, the bulk of the proceeds comes from taxes. Thus, when the Council on Revenues revised its forecast of general fund tax revenues downwards creating more than a $2 billion shortfall, that hole represented more than 20 percent of all state general fund spending for the next two years. And it appears that actual tax collections may sink even lower before this fiscal year is over.
To raise $1 billion per year from current general fund tax resources, rates would have to be increased to generate another 25 percent in general fund tax collections. But raising taxes by that amount in a slumping economy probably won’t generate anywhere near the amount needed because of the slower economic pace. Thus, state officials have very few options for generating additional revenues despite the call by the public employee unions for an increase in taxes.
On the other side, as the day draws closer to the furloughs being sought by administration officials, the public employee unions, as expected, are taking the issue to the courts. But what if the furloughs are thrown out? If the state has no money, are they going to issue IOUs instead of paychecks? And if lawmakers come back into session and raise tax rates, how many families and businesses will be able to meet those new obligations? Will families move out of state and businesses close down? Or as the governor has suggested, will the state have to lay off workers? And what kind of economic impact will that have?
If public employees want to know what it is like to be unemployed, they should ask their brothers and sisters in the carpenters union where it is estimated that nearly 3,000 are on the bench; or ask Aloha Airline’s employees who have yet to find a job, or the former employees of Molokai Ranch.
Finally, public employees say that they are paid substantially less than their private sector counterparts. On the whole that is not entirely true as there are disparities both ways. But what is true is that public employees have far more generous benefits than those in the private sector and unlike those in the private sector, they are not employed at will but enjoy job security that cannot be found in the private sector. So taking a pay reduction as a result of a furlough is far better than having no paycheck at all.
Next week we will look at a comparison of public and private employees.
• Lowell Kalapa is president of the Tax Foundation of Hawai‘i, a private, nonprofit, non-partisan, educational organization established to research issues confronting governments in the area of public finance, taxation, and public administration. It is supported entirely by private contributions.
What those responses did reflect was a lack of understanding of the reality of the financial situation faced by the state and differences between public and private sector employment. Perhaps it is incumbent that a little time is spent on these two issues to clarify the limited alternatives available and the consequences of those alternatives.
Let’s take the financial situation first. Funding for state government comes from a variety of sources, the most obvious of which are taxes levied by state government including the ubiquitous general excise tax often called the state’s sales tax. The other obvious state tax is the net income tax on individuals as we see it deducted from our wages and salaries before we get our take-home pay. Not so obvious taxes include the taxes on businesses such as the net income tax, the bank franchise tax, the public service company tax on public utilities, and the specific excise taxes on alcoholic beverages and cigarettes because those taxes are buried in the price of those specific products.
While most of the proceeds from state taxes go into the state general fund, there are some taxes that are earmarked for specific purposes and, therefore, go into what are called special funds. These include the state vehicle taxes like the gasoline tax, motor vehicle weight tax and vehicle registration fees. The transient accommodations tax or hotel room tax is earmarked for visitor promotion and other visitor related programs and underwrites the grants-in-aid program for the counties. Some of the proceeds also go into the state general fund. Another earmarked tax is the conveyance tax which funds the affordable housing trust fund and the natural area reserve program of the state Department of Land and Natural Resources and more recently the Legacy Lands fund.
But the general fund is really at the heart of the problem as it represents nearly half of the total state budget or about $5.4 billion of spending for each year of the fiscal biennium. While there are other resources for the general fund, the bulk of the proceeds comes from taxes. Thus, when the Council on Revenues revised its forecast of general fund tax revenues downwards creating more than a $2 billion shortfall, that hole represented more than 20 percent of all state general fund spending for the next two years. And it appears that actual tax collections may sink even lower before this fiscal year is over.
To raise $1 billion per year from current general fund tax resources, rates would have to be increased to generate another 25 percent in general fund tax collections. But raising taxes by that amount in a slumping economy probably won’t generate anywhere near the amount needed because of the slower economic pace. Thus, state officials have very few options for generating additional revenues despite the call by the public employee unions for an increase in taxes.
On the other side, as the day draws closer to the furloughs being sought by administration officials, the public employee unions, as expected, are taking the issue to the courts. But what if the furloughs are thrown out? If the state has no money, are they going to issue IOUs instead of paychecks? And if lawmakers come back into session and raise tax rates, how many families and businesses will be able to meet those new obligations? Will families move out of state and businesses close down? Or as the governor has suggested, will the state have to lay off workers? And what kind of economic impact will that have?
If public employees want to know what it is like to be unemployed, they should ask their brothers and sisters in the carpenters union where it is estimated that nearly 3,000 are on the bench; or ask Aloha Airline’s employees who have yet to find a job, or the former employees of Molokai Ranch.
Finally, public employees say that they are paid substantially less than their private sector counterparts. On the whole that is not entirely true as there are disparities both ways. But what is true is that public employees have far more generous benefits than those in the private sector and unlike those in the private sector, they are not employed at will but enjoy job security that cannot be found in the private sector. So taking a pay reduction as a result of a furlough is far better than having no paycheck at all.
Next week we will look at a comparison of public and private employees.
• Lowell Kalapa is president of the Tax Foundation of Hawai‘i, a private, nonprofit, non-partisan, educational organization established to research issues confronting governments in the area of public finance, taxation, and public administration. It is supported entirely by private contributions.
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The following are comments from the readers. In no way do they represent the view of kauaiworld.com.
Lopaka wrote on Jun 28, 2009 8:47 AM:
" Discussion and explanation will not change the reality of a decision. Great article for Government 101. There is a saying that willl remain long after the discussion and explanations are over, " A person convinced against their will, is of the same opinion still." Government will never be run like business because the votes are not there. "
krosen wrote on Jun 28, 2009 5:39 PM:
" Good job identifying key aspects of the problem (facing the scale of the projected shortfall in revenue, and differences in public and private employment). Good also in listing many particular public revenue sources. The rest of this article was not as good, but the rest is probably seen as necessary set-up for the promised forthcoming piece comparing public and private employment. I hope that space remains for comparing potential solutions to the problem.
I think there are disappointing insinuations in several phrases in the current article; disappointing especially when we need collective understanding and cooperation to try to get through these times, not promotion of division of citizens to 'one side of the aisle' or the other.
It is my own prejudice, but it is hard for me to take the writer of this article seriously when he begins by referring to 'public employees' and 'employees or businesses in the private sector' as being from different sides of the 'aisle'. My guess is the "aisle" he refers to is the divide between legislators seated in segregation according to political party affiliation when in-chambers, in-session. I think that the population of actual legislators has been conspicuously quiet since "the earlier commentary" (presumably by the same writer in the same venue, after the Governor’s announcement of her plan to furlough; if all readers aren't dedicated followers of this writer in this place, then apparently it is no big loss to either the writer or the newspaper if the reference is unclear). Was it the writer’s intention to say that the distinction of public employees from all others parallels that of Democratic vs. Republican party affiliation in the legislature, or Democratic vs. Republican party affiliation in those sectors of employment or personal income? Neither makes sense, even though the writer throws in an “of course” so those in-sync with his thinking can pat themselves on the back for their understanding of the situation. In the state legislature, 88% of the House members are Democrats, 12% Republicans; in the Senate, 92% and 8%, respectively. In Hawaii, citizens are not required to register a political party affiliation, and voting affiliation has real meaning only in terms of votes. Even in Presidential general elections, about 1/3 of already-registered voters in Hawaii choose not to “affiliate” themselves at all, by not voting. Among those eligible to vote, the proportion is higher.
I think any ‘this side of the aisle’ or ‘that side of the aisle’ distinction is fundamentally flawed in that it seeks a dichotomous categorization of people with respect to this matter, and that’s just not realistic. Many public employees are also private employees, and even higher proportions of Hawaii’s households and families receive income from public funds and private funds—directly through employment and otherwise. Government services, and lack thereof, affect us every day throughout our lives (think of the impacts of a lack of regulatory oversight leading to the current, overarching and outrageous, national financial crisis). Please don’t see solving the State’s financial crisis as an ‘us’ versus ‘them’ issue, ‘public’ versus ‘private’. The great bulk of funding moving through our economy comes one way or other from the citizens: most of us pay taxes, I’ll bet even more of us buy products and services (taxed or not). In the end, taxpayers pay the bulk of everything: state GET and Matson shipping (sur)charges; $22,000-a-year state office clerks and $220,000-a-year barge captains. To suggest that increased costs to “everyone” is only through taxes and that each of us is selectively immune from increased private sector charges (either increased prices, or level prices for shrinking packages) is at best short-sighted and in-fact incorrect. At least governmental fee increases include deliberation and accountability via elected intermediaries of the citizenry. Private sector actions are by fiat, and if the “free-market”, “entrepreneurial”, “job-creating” actions of private sector businesses don’t work (especially the really big, really successful, run-like-a-business giants so idolized in the business world), then they need government bail-out. Smaller businesses across a variety of sectors get their governmental hand-outs and tax-breaks, too; not available to, but mostly paid for by, taxes paid by human individuals (not by businesses). Many businesses have feet on both sides of an “aisle” with sides “I want to receive financial benefits due to others’ tax payments” and “I don’t want to pay more taxes myself”.
I think that government services and government service are not simple alternatives to private sector employment and private sector services. The two have distinctions and are not interchangeable. Many aspects of government cannot be, and thankfully are not, “run like a business”: face the facts of the very high failure rate of US businesses in the first few years of existence. Collapse of governmental services and activities on such a scale would unquestionably be intolerable. Even if you very selectively interprets “run like a business” to refer only to honest, respectable, successful businesses, it is still the case that government cannot operate in the same way—unless you cherry-pick suitable governmental functions.
This article--suggesting that State government employees live separated from the rest of the citizens, know nothing about what it is like for someone to lose their job, receive supposedly exceptional pay and benefits, and uniformly support any increase in taxation instead of any decrease in their pay--broadly misses the mark from my perspective.
I will be very interested to see how the writer characterizes public versus private employment. Will it be contrasting all workers on governmental payrolls in the State versus all workers under private employment? Only people on State payrolls paid with Hawaii-only funds versus private employees of companies earning revenue only within Hawaii?
In addition to understanding the circumstances of the current State budget crisis (e.g., the shortfall in projected revenue) when assessing remedies, it is also important to understand the genesis of the problem, to develop remedies concordant with the causes and to make corrections for long-term financial stability. "
I think there are disappointing insinuations in several phrases in the current article; disappointing especially when we need collective understanding and cooperation to try to get through these times, not promotion of division of citizens to 'one side of the aisle' or the other.
It is my own prejudice, but it is hard for me to take the writer of this article seriously when he begins by referring to 'public employees' and 'employees or businesses in the private sector' as being from different sides of the 'aisle'. My guess is the "aisle" he refers to is the divide between legislators seated in segregation according to political party affiliation when in-chambers, in-session. I think that the population of actual legislators has been conspicuously quiet since "the earlier commentary" (presumably by the same writer in the same venue, after the Governor’s announcement of her plan to furlough; if all readers aren't dedicated followers of this writer in this place, then apparently it is no big loss to either the writer or the newspaper if the reference is unclear). Was it the writer’s intention to say that the distinction of public employees from all others parallels that of Democratic vs. Republican party affiliation in the legislature, or Democratic vs. Republican party affiliation in those sectors of employment or personal income? Neither makes sense, even though the writer throws in an “of course” so those in-sync with his thinking can pat themselves on the back for their understanding of the situation. In the state legislature, 88% of the House members are Democrats, 12% Republicans; in the Senate, 92% and 8%, respectively. In Hawaii, citizens are not required to register a political party affiliation, and voting affiliation has real meaning only in terms of votes. Even in Presidential general elections, about 1/3 of already-registered voters in Hawaii choose not to “affiliate” themselves at all, by not voting. Among those eligible to vote, the proportion is higher.
I think any ‘this side of the aisle’ or ‘that side of the aisle’ distinction is fundamentally flawed in that it seeks a dichotomous categorization of people with respect to this matter, and that’s just not realistic. Many public employees are also private employees, and even higher proportions of Hawaii’s households and families receive income from public funds and private funds—directly through employment and otherwise. Government services, and lack thereof, affect us every day throughout our lives (think of the impacts of a lack of regulatory oversight leading to the current, overarching and outrageous, national financial crisis). Please don’t see solving the State’s financial crisis as an ‘us’ versus ‘them’ issue, ‘public’ versus ‘private’. The great bulk of funding moving through our economy comes one way or other from the citizens: most of us pay taxes, I’ll bet even more of us buy products and services (taxed or not). In the end, taxpayers pay the bulk of everything: state GET and Matson shipping (sur)charges; $22,000-a-year state office clerks and $220,000-a-year barge captains. To suggest that increased costs to “everyone” is only through taxes and that each of us is selectively immune from increased private sector charges (either increased prices, or level prices for shrinking packages) is at best short-sighted and in-fact incorrect. At least governmental fee increases include deliberation and accountability via elected intermediaries of the citizenry. Private sector actions are by fiat, and if the “free-market”, “entrepreneurial”, “job-creating” actions of private sector businesses don’t work (especially the really big, really successful, run-like-a-business giants so idolized in the business world), then they need government bail-out. Smaller businesses across a variety of sectors get their governmental hand-outs and tax-breaks, too; not available to, but mostly paid for by, taxes paid by human individuals (not by businesses). Many businesses have feet on both sides of an “aisle” with sides “I want to receive financial benefits due to others’ tax payments” and “I don’t want to pay more taxes myself”.
I think that government services and government service are not simple alternatives to private sector employment and private sector services. The two have distinctions and are not interchangeable. Many aspects of government cannot be, and thankfully are not, “run like a business”: face the facts of the very high failure rate of US businesses in the first few years of existence. Collapse of governmental services and activities on such a scale would unquestionably be intolerable. Even if you very selectively interprets “run like a business” to refer only to honest, respectable, successful businesses, it is still the case that government cannot operate in the same way—unless you cherry-pick suitable governmental functions.
This article--suggesting that State government employees live separated from the rest of the citizens, know nothing about what it is like for someone to lose their job, receive supposedly exceptional pay and benefits, and uniformly support any increase in taxation instead of any decrease in their pay--broadly misses the mark from my perspective.
I will be very interested to see how the writer characterizes public versus private employment. Will it be contrasting all workers on governmental payrolls in the State versus all workers under private employment? Only people on State payrolls paid with Hawaii-only funds versus private employees of companies earning revenue only within Hawaii?
In addition to understanding the circumstances of the current State budget crisis (e.g., the shortfall in projected revenue) when assessing remedies, it is also important to understand the genesis of the problem, to develop remedies concordant with the causes and to make corrections for long-term financial stability. "
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wailuaboy wrote on Jun 28, 2009 6:53 AM:
Mr. Kalapa is fully aware of this, but it would ruin his right wing anti-government argument, so he neglects to mention it. Truth is an unfortunate inconvenience for Mr. Kalapa.
IF there were lay-offs, and Lingle has yet to provide any support or data whatsoever for the ever changing numbers she trumpets so loudly in the media, it would affect part-time temporary and new hire employees only. There is no indication at all that regular permanent employees would need to be "rif-ed". Lingle continues to wage a media battle against the unions that supported her opponent in the last election, with no regard at all for the brutality it will visit on people who work hard every day under increasingly difficult conditions to provide services to the residents of Hawaii least able to help themselves.
None of this needs to be happening. There is sufficient money in the "rainy day fund" to cover most of the short fall, and a very small increase in luxury and "sin" taxes would easily cover the rest, but Lingle refuses to release it. If this isn't a "rainy day", it's hard to imagine what might be. Short of a plague of locusts, this is it. It's exactly the situation the fund was created to address. Unfortunately, Lingle would rather continue her single-minded campaign against the unions, regardless of who is hurt or how much, than support her own hard working employees. This is not about money, it's about punishment, and revenge. Lingle is determined to extract her pound of flesh no matter the cost.
Mr Kalapa could, of course, have told you all this, but he chose not to. Truth and fairness seem to be in increasingly short supply these days, a recession not of dollars but integrity. "