Thumbing Our Nose at the Feds

by Tom Yamachika, President, Tax Foundation Hawaii

Those of you who have been following the saga of Honolulu rail know that the Honolulu City Council is considering an ordinance to extend the rail tax. Although the state Legislature passed and Governor Ige signed a law authorizing a five-year extension, the state law doesn't extend the rail surcharge unless the counties adopt the tax or the extension. So the county or counties that want to jump on this train need to adopt an ordinance by the middle of next year.

During the discussions that took place in recent Honolulu City Council hearings, council members have proposed draining off some of the surcharge money to be used for affordable housing or attacking the homeless issue. Mayor Caldwell flew to Washington, DC and has said that the Federal Transit Administration (FTA) is going to withhold payment of $250 million until the ordinance extending the rail surcharge is passed and signed into law. In response, the Council chair wondered out loud whether it would be better to forget about our agreement with the FTA, return their money and refuse the rest of the $1.5 billion to be paid over the course of the project, as a way to take back “more control.”

To understand the City’s position, consider the example of a “cooperative marketing agreement.” Suppose I have a grocery store and I sell DeLima’s hot dogs. I make a deal with DeLima’s. They will pay me up to $500 provided I spend it on advertising that features their hot dogs. I show them my media bills and a copy of the ads, and they pay me 40% of what I’ve spent. This money is not free. If I spend it on the agreed upon advertising, I get paid the money and both DeLima’s and my business benefit. If I don’t advertise DeLima hot dogs, I will not get reimbursed, and DeLima’s will want to take back any money that they might have paid up front for the deal.

The City, in effect, has separate cooperative agreements with the FTA and the State. The State is making a powerful funding mechanism available to the City, but one condition of the funding is that it must be used for rail. The FTA is making money available, but there are conditions attached to ensure that it is going to be used for rail and that the rail will actually get built. These agreements didn't happen overnight; it took more than a decade to reach the point where the State is willing to give the City surcharge authority and the FTA is willing to take out its checkbook. Again, the money wasn’t and isn’t free. It is for a rail project that would bring benefits to different levels of government. That’s why it is not realistic to think that the City can change the rules now and use that money for whatever it wants.

Let's take a look at some numbers to see the magnitude of the issue. The amount of county surcharge that has been collected for the project is about $1.76 billion from 2007 to date. The amount of money the FTA is making available under the grant agreement is about $1.55 billion, of which about $0.45 billion already has been paid. The amount of money taken in by the City in property taxes a year, according to its financial report for the year ended June 30, 2014, is $0.85 billion. The City's total operating budget for the same period was $2.3 billion. Clearly, we are talking about massive numbers. If we rip up the federal agreement, for example, we would need to raise the property tax by about 50% just to cover the money we would have to pay back to the FTA. Are we really willing to do that to gain “more control” over the rail route?

Similarly, skimming money from the surcharge to fund affordable housing would breach the state deal. If the City tried to do that it might find out that its funding mechanism disappears. If that happens the FTA would likely pull the plug as well, leaving us with a partially built rail and massive obligations. Hopefully, cooler heads will prevail when we consider what is best for Honolulu.

---30---