Maintenance of Effort, Part 2
 
A little more than a month ago, we ranted on about Senate Bill 815, the “maintenance of effort” bill, that would ensure funding for the Department of Education (DOE).

After some refinement after going through several legislative committees, it now works like this.  The bill creates a “public education stabilization trust fund.”  If the appropriations to DOE in any legislative session are lower than the appropriations to DOE in the preceding legislative session, then the difference is scooped out of general excise tax collections and dropped into the fund.  DOE can then spend the money in the fund to make up for the funding shortfall.  (Which means the fund is not really a trust fund, but a special fund, under criteria being applied by the State Auditor.)

DOE, which is strongly supporting the bill, argues that there are many federal acts and grant programs, including the CARES Act, which themselves have maintenance of effort requirements.  In other words, if the State does not maintain a consistent funding level for education, the federal government will reduce or eliminate its funding.  “This measure would safeguard the Department's ability to fulfill these obligations,” DOE testified.

The maintenance of effort requirements in the CARES Act are imposed by section 18008 of the Act, which apply to both Governor’s Emergency Education Relief (GEER) grants and Elementary and Secondary School Emergency Relief (ESSER) grants authorized by the Act.  The U.S. Department of Education stated that a State can demonstrate support of education in different ways.  USDOE said that it is purposely leaving he statutory term “support for higher education” undefined by regulations so that States have flexibility in determining how it is satisfied. 

Other federal education statutes have maintenance of effort requirements, such as the Individuals with Disabilities Education Act (IDEA) for the support of individuals with disabilities.  Even there, the law and regulations have flexibility in the way States can satisfy the requirements and have a mechanism by which the State can apply for waiver of the requirements for reasonable cause, such as a precipitous decline in resources following a natural disaster.[1]

The maintenance of effort provisions of IDEA were enacted at the end of 2004.[2] In other words, those provisions have been around for more than 16 years and it does not seem that Hawaii has had a problem following them.  No budgetary trickery like the  gimmick proposed in SB 815 was needed to comply with the maintenance of effort requirements in IDEA.  The USDOE’s guidance shows that no gimmick is required to satisfy the CARES Act either.

The HSTA, however, in its testimony in support of the bill, argues that the budget gimmick is not only necessary, but doesn’t go far enough.  It notes that part of the bill would allow the Governor to suspend the maintenance of effort requirements if we have a sudden and severe decline in revenue; exceptional circumstances like a natural disaster; or a sharp decline in student enrollment.  HSTA wants the suspension provisions out of the bill, arguing that the only time the bill would be needed is when there is an economic downturn.  (Although the underlying message seems to be that they want everyone except them to suffer during economic calamity.)

The reality is that future legislatures are not, and cannot be, bound to the budgeting decisions of today. If a future legislature really wants to lower the budget of the Department of Education, perhaps in a year like this one where there simply is not enough money to go around, it can repeal the provisions introduced by this bill. The mechanisms in this bill are not necessary, and they complicate and obfuscate the budgeting process.  And if we do enact them, we create a precedent for other departments to follow.  Perhaps the Department of Health would be sponsoring a similar bill next year, the University of Hawaii in the following year, and the Department of Human Services in the year after that. 

With that said, do we need to make budgeting more difficult by enacting a bill like this?
 
[1] See, for example, 20 USC section 1412(a)(18); 34 CFR section 300.163.
[2] Pub. L. No. 108-446, 118 Stat. 2647, 2688.

National Attention!
 
We in Hawaii are getting national (and some international) attention.

But not the good kind.

Witness an editorial from the Wall Street Journal that was published on March 12, 2021, titled “Confiscation in Paradise:  Move to Hawaii, pay the nation’s highest state income-tax rate.”

The state Senate voted Tuesday to raise the top income-tax rate to 16% from 11%. This would leap above the 13.3% California takes from its highest earners, or the 12.7% that New York City dwellers pay. Oh, and Hawaii’s top rate would kick in at a mere $200,000 of income. It would also slam many small business owners who pay taxes at the individual rate. As if they haven’t suffered enough during the Covid lockdowns.

The bill would also raise Hawaii’s capital-gains tax to 11% from 7.25%, a blow that will fall heavily on the state’s retirees. The top rate on corporations and real-estate investment trusts would rise to 9.6% from 6.4%. Legislators are shaking every conch shell in a mad grab for new revenue.…

Hawaii’s new tax increases would supposedly last through 2027, taking far more out of the economy than needed to make up for a sluggish 2020. But “temporary” tax hikes almost always become permanent as politicians rush to spend the new revenue and refuse to cut spending when the higher tax rates are set to expire.

The comments of the Wall Street Journal are not alone.  Other news services around the country also are commenting on features of the “Enola Gay” bill, Senate Bill 56, a previous version of which we discussed just a couple of weeks ago.  There were stories, for example, in U.S. News & World Report, the San Francisco Chronicle, and Shine, an English-language news service in China related to the Shanghai Daily.

According to a 2017 article by the Brookings Institution, the overwhelming majority of businesses are not C corporations subject to the corporate income tax.  About 95% are in passthrough entity form where the business owners, rather than the business entity, are taxed at their individual income tax rates.  So, a steep hike in the individual income tax will fall upon businesses, and we can expect that the tax bite swiftly will be reflected in the prices of goods and services that those businesses provide.  Lots more of us will feel the bite than just “the rich.”

And even if people directly affected by the tax hikes can’t pass them on, another option they have is to “get out of Dodge” – jump on a plane and move somewhere else.  Our state population in the past few years has been going down, not up, and a study from the American Legislative Exchange Council sums it up by saying:  “Unless high-tax states mend their ways, low-tax with pro-growth policies will benefit from the resulting flow of capital and people.”  The result?  “Data clearly shows that low tax burdens enhance a state’s chances of performing well economically…. On the other hand, a high tax burden reduces a state’s chances of performing well.  Of course, other policy variables impact economic performance, but tax burden is most consequential.”

With all of these prospects for negative economic consequences, do we really want to be in the national spotlight for having the absolute, tip-top, undisputed first place ranking for the highest tax rates imposed on individuals?

The State has begun to ramp up vaccinations to qualified individuals in Phase 1C—but what does this mean for Hawaii’s employers?
 
It means that vaccinations are now open to all essential workers! 
 
To get essential employees approved to receive the vaccine, fill out this Department of Health survey to get started. 
 
You can review the info below and find additional details at https://hawaiicovid19.com/vaccine.
 

* Phase 1A & 1B essential workers: 

• First responders
• Corrections officers and staff
• Emergency services dispatchers
• Individuals essential for government operations
• Critical transportation infrastructure workers
• Critical utilities workers 
• Teachers, childcare and educational support staff 
• US Postal Service employees
• Grocery store workers 
• Plus, other essential workers not mentioned above that are important to the functioning of society and have an increased risk of exposure due to their jobs.

 
** Phase 1C essential workers: 

• Hotel and hospitality workers
• Food service workers
• Banking and finance workers
• Transportation workers
• Construction workers
• Media
• Logistics
• Information technology workers

 
If you have any questions about managing your employees as Hawaii opens up its economy, I’d be happy to share what ProService is doing to help our clients review their people strategy to drive business performance and overall workplace safety and compliance. Happy to chat if you’d like to learn more.
 
Mahalo,
Tambara
 
 
 
Tambara Garrick
Business Development Manager
 

ProService Hawaii | proservice.com   
tambara.garrick@proservice.om | Direct: (808) 269-8457