Rail Surcharge Tax Extensions & Inconsistent Misinformation

by Natalie Iwasa, WhatNatalieThinks.Blogspot.com, April 8, 2015

People have been telling me they’ve seen me on Olelo or heard that I was Honolulu Hale.  A lot has been happening with the rail project, and I’ve been checking a few things, in addition to providing testimony.  I’ll continue digging into the numbers, reports and documents that HART and the city are giving to us, but I wanted to share this with you now.

The legislature is currently considering a bill to extend the rail surcharge tax.  If Mayor Caldwell and HART had it their way, it would be extended in perpetuity.  It seems they’ve come to realize that the legislature is not going to go that far, but they are still pushing for a 25-year extension.

After digging into just a few things, I found some documents that just don’t make sense.  Some numbers we’ve been given are just downright wrong.  I therefore have serious concerns about the information that is being provided to the legislature and to us.  I brought this up at a recent HART meeting and again today at a Senate Ways & Means Committee meeting.  I’m posting my testimony here, so you can see the sources I used as well as the example documents I refer to.  I hope you will take time to read it and take action now, before it’s too late.

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Aloha Chair and Committee Members, April 7, 2015

Thank you for allowing me the opportunity to provide testimony on HB 134, HD1, SD1 and SD2 which would make various changes to the authorization for counties to collect a surcharge tax. I oppose an extension of the rail surcharge and authorization for other counties in Hawaii to implement a surcharge tax. I would support a reduction of the 10% administrative fee.

Attached is testimony I gave to the HART board of directors on April 2. It includes sources for my testimony and details of the reasons I oppose the surcharge extension.

The following is therefore a summary of my opposition: 

• The 2022 deadline is the only mechanism in place to force HART to control its costs. The Honolulu City Council did not cut HART’s operating or CIP budgets last year, and they currently have no proposed amendments to cut the HART budgets for this coming fiscal year; 
• The surcharge is a regressive tax and hits low-income residents the hardest. Over 36% of Hawaii households make $50,000 or less per year and already have a difficult time making ends meet; 
• We were told this would be a temporary tax; 
• Only approximately 17% of the surcharge is paid by visitors; 
• We have been given inconsistent, incomplete and incorrect information by HART; 
• Money is being “left on the table” in the form of high administrative fees in the hopes that you will extend the surcharge; and 
• There are too many unanswered questions.

I urge you to vote “NO” on this tax extension and only pass a bill that reduces the administrative fee. That is the right thing to do at this time.

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Aloha Members of the Board of Directors of HART, April 2, 2015

Thank you for this opportunity to provide testimony regarding Resolution 2015-5, which supports the general excise tax surcharge for 25 years. I oppose this resolution for the reasons that follow.

The only way to contain costs is to force HART to live within its current means, i.e., with the funding it will receive through 2022. Contracts were awarded prior to federal approval was received and resulted in $76 million in delay costs, according to Hawaii News Now (May 16, 2014). Millions have been wasted on coloring books, key chains and other questionable public relations items and services. The Honolulu City Council made no cuts to last year’s HART operating and CIP budgets and none have been proposed so far this year. More can be done to reduce the overall cost of the rail project, but the people who should be doing so are not.

The general excise county surcharge tax is a regressive tax that hits low-income people the hardest, i.e., a higher percentage of their already very-limited money goes to the tax. According to the 2013 State of Hawaii Data Book, over 36% of households in Hawaii make less than $50,000 per year, and in neighborhoods such as Waianae and Makaha, the median household income isn’t even that high – it’s about $40,000 per year. The very people you claim to be trying to help are the ones who will be hurt the most.

Mayor Caldwell has stated the surcharge is the best alternative because 33% of the tax is paid by visitors. His source for that, however, is a tax review commission report that considered only statewide expenditures. As you know, the surcharge is a tax on Oahu. Following are statewide vs. Oahu visitor expenditures according to the Department of Business and Economic Development and Tourism along with the calculation of percentage of expenditures on Oahu:

When we consider visitor expenditures only on Oahu, which has been an average of 51% for the past seven years, the rate of surcharge paid by visitors is only about 17%, not 33%.

Other information that has been provided regarding the rail has been inconsistent or incomplete. For example, the attached report, “Revenues from January 1, 2007, to December 31, 2014,” is a mixture of cash-basis and accrual-basis numbers, but there are no notes to indicate which are cash basis and which are accrual basis. According to HART staff, the schedule was given to state senators in response to questions raised by Wesley Machida, State Director of the Department of Budget and Finance. The schedule was supposed to report cash-basis revenues, but by including surcharge revenues on an accrual basis, the annual “Total Revenues” don’t make much sense. In addition, the schedule appears not to include the $298 million in beginning project cash funds.

Another example of inconsistent information is the “Capital Plan Cash Flows” spreadsheet that was provided to the Honolulu City Council and attached to their Resolution 15-7 related to the memorandum of understanding between the City and HART for government obligation bond funding. The “FFGA Total” column on line “Total Project Uses of Funds” does not add up – the $7,841 should be $7,981. After meeting with HART staff, I understand certain amounts were originally netted in the original FFGA, and the spreadsheet was changed to show those amounts separately. One of those items was the $140 Reserve Fund Balance. When that was separated out, however, the $1,798 that included it was not reduced. It was therefore double-reported. As noted on the spreadsheet, which is attached, the $140 million was also included in the “Updated Total” column, where it was added in the total line. It shouldn’t take a meeting with HART to understand what is being presented in financial reports to various agencies, and worse yet, this particular report should have been clarified prior to inclusion in the final resolution that was adopted by Council on April 1, 2015.

Earlier this year, The Tax Foundation reported the 10% surcharge administrative fee covers 85% of the operations of the state Department of Taxation (DoTax). (Tom Yamachika: Honolulu Rail 10 Percent Surcharge Is a Bad Tax, January 18, 2015.) The DoTax testified that based on an effective date of July 1, 2015, a reduction of the fee to 3% would bring in an estimated $119 million by the end of fiscal year 2021. This is more than half of the amount needed to replace the 5307 bus funds. The right thing to do is to support this reduction in the fee rather than leave the funds “on the table” as a bargaining chip in exchange for a tax extension.

Another suggestion for potential revenue is the penalties and interest charged on late payments of the surcharge tax. When the surcharge first went into effect, the state DoTax separately noted the penalty and interest related to the surcharge when it sent late notices to taxpayers. After a couple of years, however, it stopped doing so. This caused confusion among some taxpayers. The DoTax recently started including the information to taxpayers once again. It is not clear to me, however, whether the penalties and interest are included with the surcharge revenues given to HART. I do not know the legality of including the penalties and interest with the surcharge tax, but it would be reasonable to expect that those funds be given to HART.

While researching these issues, I noted that certain letters given to legislators were not given to the Honolulu City Council. In addition, at least a couple of these letters were not easily accessible by the public nor were they posted on HART’s, the state legislature’s or the council’s websites. Documents provided to the legislature and the council in response to questions should be provided to the public.

One final note -- in the last “Whereas” clause of the resolution, it states: “. . . the county surcharge . . . represents the most viable and equitable means . . . “ The surcharge tax is not equitable. Please remove that from the resolution prior to its adoption.

PDF: Testimony HB134 HD1 SD1 surcharge extension WAM 4-7-15  (Click to see additional tables)