Barreling Toward a Tax Hike!

by Tom Yamachika, President Tax Foundation Hawaii, January 17, 2021

On January 5, State Director of Finance Craig Hirai was (kind of) answering questions before the House Finance Committee on the Administration’s budget.

In response to questions on what the Administration had planned for revenue increases, he stated that the plan is “kind of embargoed right now.”

“You cannot just present the plan and say the details are embargoed,” replied Rep. Sylvia Luke, House Finance chair. “There is an obligation to be honest with the public, and honest with the Legislature to provide the details on what tax increase assumptions were built into the financial plan that was submitted on Dec. 21.”

“I don’t have my list with me,” Hirai said.

“So, let me just ask you then, are you planning to raise the carbon tax?”

“Possibly.”

“Are you planning to institute a sugar tax?”

“Possibly.”

“Are you planning to raise the GET [general excise tax]?”

“I don’t think so.”

In this article, we’ll provide some information on “the carbon tax,” which is most likely the “barrel tax.”

Hawaii has two kinds of taxes on fossil fuels. One is the liquid fuel tax, which is normally paid at the pump. We don’t think this is the “carbon tax” referred to because the fuel tax is earmarked for the State Highway Fund, which only the Department of Transportation can tap, and if this earmark is changed there may be federal consequences because the U.S. Department of Transportation contributes federal highway money to it.

The other tax is the environmental response, energy, and food security tax, which we refer to as the barrel tax. It has a history of twists and turns.

This tax started off as the environmental response tax, imposed at 5 cents a barrel of imported petroleum product to create a fund for environmental cleanup in case of an oil spill in Hawaiian waters.

In 2010, the tax rate was increased by 2000% (!) to $1.05. After the increase, the vast majority of the tax was used not only to shore up our general fund, but also to feed various special funds that pay for environmental conservation programs, energy and food security, and related activities. As a result of the additional responsibilities placed upon the fund, it was given its new and much longer name. The tax increase was set to sunset in five years, on June 30, 2015. Gov. Lingle vetoed it at the time, but the Legislature overrode the veto and enacted the change anyway.

In 2015, the barrel tax was expanded to encompass not only petroleum products, but any kind of fossil fuel. Thus, non-petroleum fuels such as liquefied natural gas, propane, and coal were subjected to the tax as well. In addition, the sunset clause on the 2000% tax increase was snipped away, making the 2010 increases permanent.

In the Department of Taxation’s most recent annual report, the barrel tax was levied on 23.8 million barrels of petroleum for the fiscal year ending June 30, 2020, and it was imposed on 5.9 million BTU of non-petroleum fossil fuels, taking in $26.1 million in total.

$26.1 million, however, is much, much smaller than our projected revenue shortfall (more than $1 billion for each of the next four years). So perhaps we need to brace ourselves for another dramatic increase in the tax rate – another 2000% since they already did that once, perhaps? Either that, or we may be in for a substantial expansion of the scope of the tax. In either case, the culture of silence that the Administration seems to be embracing is troubling.

We will know for sure on January 25th, the date of the State of the State address, because all Administration bills will be formally introduced and thus revealed to the public at that time.