Our state constitution has a number of provisions in it that are designed to control how our government spends our money.  (Not “their” money, hmph.)  Most of these provisions are in Article VII.

Section 11 of Article VII contains what we call the Lapse Provision.  It basically says that when lawmakers appropriate taxpayer money (from the general fund or from general obligation bonds, which are borrowings against taxpayer money) to a state agency, the agency has three years to spend it or encumber it (meaning that the state has a binding contract to spend that money).  If it doesn’t, the money would return to the general fund, to be available for appropriation by the lawmakers who are then in power.  According to records from the 1978 Constitutional Convention where the provision was drafted, the purpose of the Lapse Provision was to encourage agencies to review the programs that they had.  If a program wasn’t working, the agency could get rid of it; if it was, the agency could get reauthorization from current lawmakers so the program could continue.

Some agencies, however, were not on board with the idea.  They tended to view money appropriated to them as “their” money (as opposed to taxpayer money).  They naturally preferred to spend their money when and as they saw fit, without having to be bothered with going back to the square building on Beretania Street again.

Not too long after the constitutional provisions were adopted, someone had a bright idea for a workaround.  The Lapse Provision only applies to spending of general fund money and general obligation bond proceeds.  It does not apply to spending from special funds.  So, they said, the problem is solved if money is simply moved from the general fund to a special fund.

Agencies marveled at the simplicity of this workaround.  Soon, non-general funds began popping up like weeds.  The State Auditor began warning that such funds led to “insidious” financial results  when there were only 166 of them.  Over the years, the number ballooned.  There were more than 1,800 in 2020.  Some are legitimate, such as special funds for self-sustaining programs, as the constitutional convention committee explained.  Some, however, are there to work around the constitutional expenditure controls like the Lapse Provision.  There are now so many special funds that it is impossible for anyone to say with certainty how much money our state government has.

The Dam Special Fund, established by Act 232 of 2024, uses taxpayer money to subsidize repairs on aging dams to mitigate the public safety risks from catastrophic events such as dam failures.  This is a perfectly legitimate use of taxpayer money, as long as it is in line with lawmakers’ priorities which, naturally, change over time.  That is why it needs to be reauthorized periodically and was in fact reauthorized in the 2025 budget bill.  However, the Dam Special Fund was set up — and the bill itself says this — specifically to avoid the possibility of funds lapsing.  We saw the fund as illegitimate and asked the court to declare it so.

The Circuit Court saw the matter a little differently.  It saw only one appropriation of general fund money in Act 232 — a transfer from the general fund to the special fund, which was accomplished within the three-year period.  No constitutional issue.  End of case.  Final judgment is in favor of the State.

But is it really that easy to avoid the constitutional expenditure controls?

It looks like we will need to ask higher courts to weigh in on this matter.

We have written about such a tax on several occasions before, most recently here.

The Honolulu City Council considered different versions of this tax in Bill 6 (2020), Bill 9 (2022), and Bill 46 (2024).  On each occasion it failed to pass.

But that hasn’t stopped proponents of the idea.  They have brought the matter to the Honolulu Charter Commission, the folks charged with proposing amendments to the Honolulu City Charter to be voted on at the November general election.  The City Charter, of course, is the foundational document for city government, much like the Hawaii Constitution is for our state.  These documents generally can’t be changed by the legislative bodies; any amendments need to go before the voters to be approved.

Recently, a Charter Commission committee shortlisted the empty homes tax proposal, known as P170.

P170 directs that the tax be imposed at no less than 2%, or $20.00 per $1,000 of taxable value, for any home that is “empty” for more than six months in a taxable year.  This is many times the current residential property tax rate of $3.50 per $1,000 of taxable value.

One hang-up with the proposal is how the concept of “empty” is defined.  There may be good reasons why a home is empty. Even the proponent of P170 has asked for exemptions to be written in to the charter provision:  “Exempt from this surcharge shall be properties that: have a valid homeowner exemption; are the principal residence of an Oahu resident more than 180 days a year; have owners on military deployment or absent due to ongoing medical care, or where the property is the subject of probate court proceedings.”  Bill 46 (2024) had even more exemptions, around 15, including that the dwelling on the property is “not fit to live in,” the owner is making “active efforts” to sell or rent the property, or there is renovation work ongoing that “reasonably requires” the owner to live elsewhere.  And how does one even enforce the tax in the first place?  How does the city government verify that a home is “empty” without looking inside, which would be a violation of privacy laws?  And how is a person accused of having an empty home prove that the home was not, in fact, empty?

Also telling is the fact that the Department of Budget and Finance, which would have to enforce this tax somehow, complained in 2024 that Bill 46 “may not fully recognize the required staffing, resources and timetable to properly implement this type of program.”  In other words, they had doubts that they could enforce the new tax with the staff they had.

It’s also worth repeating that county governments only have the authority to impose real property tax.  This power was given to the counties by the 1978 constitutional convention, which basically transferred the then-state real property tax over to the counties.  An empty homes tax doesn’t look or feel like the real property tax as it existed in 1978, so there may be some question as to whether the county can enact the tax, whether by ordinance or charter amendment.

In any event, this issue isn’t going to go away soon.

We hope that wise and cool heads prevail in the end.

It’s about the federal SNAP program to help needy families with food costs.  It used to be fully funded by the U.S. Department of Agriculture.  So, Hawaii citizens benefited from this federal largess to the tune of about $700 million a year.

The OBBBA changed this.  Now, the USDA audits the States, who are responsible for running the program and paying out the benefits, and if a State paid out too much or too little, then the State will need to pick up an escalating share of the cost depending on our “error rate.”  If our error rate is less than 6%, the USDA picks up all benefit costs as they did before.  If it’s between 6% and 8%, we need to pony up 5%, which would be around $36 million.  Between 8% and 10%, we are on the hook for 10% of the benefits.  And if the error rate is 10% or more, then we get socked for 15%, which would come out to about $109 million — which isn’t in our budget.

And then, of course, the feds didn’t make it easy for the States to comply.  We wrote about some of the drama here.  The issues included federal policy changes that kicked in immediately, giving states zero time to learn about the new changes and work them in to their processing procedures before they were made accountable for errors.

Historically, we have had issues even before OBBBA.  Our error rate for 2022 and 2023 exceeded 20%.  The USDA was thinking about whacking us with a $11 million fine, but our folks managed to talk their way out of it with promises of new, badder, and better computer system that our Legislature had no choice but to fund.

In 2024, our error rate dropped to 6.68%.  It was much better than the previous two years, but still left lots of room for improvement.

Now the 2025 error rate is out.  There is good news and bad news.

The good news is that we don’t have the worst error rate, and ours was just slightly above the national average.  Also, the penalties don’t take effect just yet.

The bad news is that our error rate was 10.92%.  Double digits mean triple penalties, and don’t expect anyone to cut us some slack.  “These payment error rates are further proof that state accountability is severely lacking in SNAP,” Agriculture Secretary Brooke Rollins said in a statement. “USDA has taken historic action to help interested states curb SNAP waste, and I hope other states, regardless of political leadership, prioritize needy families and the American taxpayer over politics.”

The Star-Advertiser reports that our Department of Human Services is keenly aware of the problem and is working hard to fix it.  DHS reported that its error rate through the end of June was 6.52%.

Again, that’s an improvement, but we are still in penalty territory.  We should be able to do better.  Our error rate for most of the last two decades was under 6%, so we should be able to get ourselves out of the proverbial hot water.

The Trump Administration was able to trot out J.D. Vance to make us a national laughingstock over Medicaid fraud enforcement.  The last thing we all want is for the administration to set us up on another issue, this one with a massive price tag which we probably won’t be able to wiggle out of like with the proposed $11 million fine.

Let’s do this.

There’s no magic involved here, only taxes.  Taxes you can see, and taxes you can’t.

The taxes you can see are things like income tax, which gets taken out of your paycheck, and general excise tax, which you can see on your receipt whenever you go to the store.

There are also lots of taxes you don’t see.

One tax that lawmakers love playing around with is called the barrel tax.  It gets paid whenever fossil fuels are imported into the State.  We previously wrote about its history here.  The tax is paid at the wholesale level, so retail customers almost never see a line item on their bills for this tax.  Yet it does get baked into the retail prices — not only at the gas station, but also for electricity (because a lot of our electricity is generated by burning bunker fuel), charges for transportation (think trucking and delivery services, because the service providers use vehicles), and charges for all kinds of tangible goods (they need to get to the stores somehow).

For the past several years, there have been proposals in the legislature to convert the barrel tax into a carbon tax.  Here’s some further information on that proposal.  The carbon tax proposals we have been seeing would be much more expensive than the barrel tax it would replace.

Our GET, furthermore, is not completely visible.  There are some very large hidden components.  For example, when a retail store buys its inventory, it pays a supplier.  If the supplier is local, another GET is imposed, this time at 0.5%.  If the supplier is out of state, then the same 0.5% tax gets imposed as Use Tax, which the retailer has to pay.  These taxes get paid by or are passed on to the retailer, and the retailer adds that in to the price of the goods.

Another hidden component is the tax on business-to-business charges.  If the retailer doesn’t own the land on which its store sits, the retailer needs to pay rent.  GET is charged on the rent, and it’s not at the wholesale rate but at the full 4.5% rate.  (And if the retailer does own the land, it needs to pay county real property tax, probably at a commercial rate that is a lot more expensive than the residential rate real property tax that most of us are used to.)  Does the retailer need help from a CPA firm to keep its books?  GET at 4.5% applies to those charges as well.  Does the retailer need power to keep the lights on, run the registers, keep the frozen food frozen?  GET isn’t imposed on that — instead, a more expensive tax called the Public Service Company Tax kicks in.  The PSC tax has a state component of 4%, similar to the GET, but also there is a county component of between 1.885% and 4.2% depending on how profitable the public utility is.

The state, furthermore, has no monopoly on business-to-business taxation.  Our federal government contributes to higher prices by imposing taxes of its own, such as fuel taxes, transportation excise taxes, communications taxes, environmental taxes, and manufacturer’s taxes on a number of different articles.

So, what’s the bottom line here?  Open up your wallet.

Do you see money inside?

Now you see it, now you don’t.

The rules work a little differently when the government is part of the agreement.  The government has the ability to contract as well, but the ability is defined and limited by law.  It should be.  We, the people, have an interest in the deals that our government is making.  Especially if tax money, or government resources paid for by tax money, is part of the deal.

When it comes to taxes, furthermore, we want our government to be consistent and fair.  We can’t always see the terms of tax deals, because they are generally private tax return information, but we as the public want some assurance that there are no sweetheart deals being given to connected insiders, and that the terms of the agreements are not wildly different from those made with other taxpayers.

Given all of that, it looks like the “settlement” that created the Anti-Weaponization Fund has some issues.  This may not be a moot problem, because although Acting Attorney General Todd Blanche is telling Congress that the fund is dead, his boss, President Trump, still thinks it’s a good idea.

The Fund is loosely connected with a lawsuit Mr. Trump, two of his sons, and his company filed in the Southern District of Florida against the government because an IRS contractor leaked tax return information to the press.  The settlement consists of the settlement agreement and two attorney general orders (here and here) signed by Blanche.

Part of the settlement consists of the Trump parties dropping the lawsuit, which they did.  A group of 35 former federal judges is trying to get the judge to reopen the suit (that challenge has its own problems primarily because courts are equipped to decide disputes between parties, and one of the issues here is whether there is any real dispute here, with Trump basically on both sides of the case).

Another part of the so-called settlement is more problematic.  The settlement agreement requires the termination of any tax audits and forbids, among other things, tax examinations on “any matters currently pending or that could be pending (including tax returns filed before the Effective Date).”

Tax settlements are governed by section 7121 of the Internal Revenue Code.  The Treasury Regulations under that section say that closing agreements shall be on forms specified by the IRS.  The IRS has two forms, Form 866 to agree upon a tax liability, and Form 906 to agree upon the tax treatment of specific matters.  The settlement here isn’t as to any specific matters, so Form 906 can’t be used.  Form 866, under IRS procedures, needs to include a liability determination for each year and tax type involved, as opposed to a blanket statement like “There shall be no tax assessed.”  The settlement agreement here is not on Form 866, obviously, and is not consistent with these regulations and procedures.

That is just one problem with the settlement.  Multiple lawsuits in other parts of the country are bringing up others.  The Department of Justice had been arguing, in the settlement agreement, the Attorney General orders, and elsewhere, that the settlement is consistent with other settlements the Department has done in the past.  That it may have been done before, however, doesn’t make it legal or right today.

Guest Speaker

William Kaneko
Partner, Denton’s Honolulu
Founder, Hawaii Institute for Public Affairs

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Of course, we in Hawaii need to be competitive nationally, so we need to pay some of our student athletes for their NIL.  Or so our University of Hawaii has been arguing.  And, as reported in the Star-Advertiser, our university has already committed to some $5 million in NIL payouts.

University officials began their journey navigating the twists and turns of the NILe environment by coming to our Legislature this past session with hat in hand, seeking $5 million.

A request for a budget line item to this effect made it into the House version of the budget, but it was swatted down in the Senate.  A separate House bill, HB 2384, made it all the way through the House but had a chilly reception, and no hearing, in the Senate.  And a compromise bill, SB 3263, tried to set up an endowment fund the income from which could be used for NIL payments.  It made it through a House-Senate conference committee, but university officials asked the House and Senate money chairs to scuttle the bill, contending that it would create more problems than it would solve.  A Senate floor vote then narrowly killed the bill, 11-12.

So, what is to become of NIL funding here in Hawaii?

According to UH’s athletic director Matt Elliott, “We’re in the budget process right now,” he said. “Our mindset is we’ve got to find those resources to cover those expenses. … We’ll find a way.”

Which means that although the Legislature tried to sink NIL funding, UH’s ship stubbornly refuses to go down.  “We can do this the easy way … or the hard way,” UH is saying.

During a hearing on another measure we were following, SB 2602, Senate Education Committee Chair Donna Kim pointed out multiple instances of UH pulling millions of dollars out from a block of money given for repairs and maintenance, and then repurposing them for other projects that UH was interested in — but were not repairs or maintenance.  One example is renovation of the Sinclair Library.

Is UH going to pull the same kind of stunt here?

We had previously written about UH’s Tuition and Fees Special Fund, which had an unencumbered balance of some $430 million.  SB 2602 was a bill to raid the fund and put excess moneys back into the General Fund (and thereby ease the pressure to raise additional money from taxpayers).  That bill died in this past legislative session when the House decided not to appoint conferees to work out the bill with the Senate.

At a hearing on that bill, UH President Wendy Hensel said, “I don’t want anybody to ask me for a dime when they have a dollar in their hand.  And I feel the same as we come to you and ask for funding.”

Fine.  UH, do what you promised.  Use that money.  No pulling from the repair and maintenance fund.  Use that fund to clear UH’s infamous backlog of repair and maintenance projects.  And, most of all, don’t use this as an excuse to ask lawmakers for taxing power (like the DOE did when they asked for and received the authority to impose school impact fees, which have been a disaster).