Share Loss of TAT Could Spell Increased GET

by Lowell L. Kalapa, Tax Foundation of Hawaii

Some legislative leaders have been taking a dog and pony show on the road to try and convince county officials to give up their revenue sharing of the transient accommodations tax (TAT) collections in return for the authorization to impose a county rate under the general excise tax.

While the idea of being able to raise their own money from a county general excise tax might be appealing, many county leaders apparently don=t want to raise additional taxes on their constituents, especially when the “fishbowl” is much smaller where there are only seven or nine members on the county council. This was no more evident than the recent situation where the Honolulu City council had to vote on redistributing the grant-in-aid monies, taking a little bit from those nonprofit organizations that had been judged deserving of their request and giving the “saved” monies to eleven other agencies who did not make the cut.

While one of the council members gave a decided “no” vote to the idea, six of the remaining council members squirmed a bit by voting yes “with reservations” indicating that they really didn’t want to be seen as completely supporting the move.

If council members could not take the heat on voting on the redistribution of grant-in-aid dollars, imagine what pressure would come to bear should the question of raising the general excise tax rate be put on the table. That’s why the legislative proposal to take back the TAT revenues from the counties and instead allow the counties to raise their own revenues by hiking the general excise tax rate met with such a cool reception.

The issue of state support for the counties has been a continual thorn in the side of the state legislature, dating back to the early years of statehood and in some form even during the territorial days. However, the first formalized grant-in-aid program for the counties came about in 1965 when the state took over the responsibilities for education and hospitals from the counties. Since the state legislature also set the tax policy for the real property tax, part of how much money the counties could raise from the real property tax was controlled by the state. Recognizing how much the counties needed to raise from the property tax, the state grant-in-aid program measured how much effort each county made to raise the needed revenues. This determined how much was given to each county. This program became known as the Act 155 grants.

However, in 1972 Congress adopted a program that was designed to financially help local governments and established what was known as the Federal Revenue Sharing Program. While assistance was primarily aimed at local or county governments, the federal program also provided some financial aid to the state with the provision that the states could not reduce their grants-in-aid to local governments. It seemed like a logical way to assure local government leaders that their support from their respective state governments would not be reduced or eliminated just because they were to get support from the federal government.

Well, don’t think local state lawmakers couldn’t figure this one out. While the federal program specified that state government couldn’t reduce their support to local government, it also did not specify that state government had to increase their support. Thus, in the years following the state’s participation in the Federal Revenue Sharing Program, grants-in-aid to the counties under the Act 155 program were frozen at $19 million. And when the Federal Revenue Sharing Program came to an end in the mid-1980’s, so did the Act 155 grants.

It was not until 1989 when the state sat on more than a half billion-dollar surplus which was the product of the newly adopted TAT and made changes to the income tax base in 1986 did the counties’ cries for state assistance get any attention. During that session, lawmakers handed out a total of $100 million to the counties.

Eventually when a site for the state convention center was selected and agreement was reached on how much of the TAT collections should be spent on visitor promotion did the counties get an allocation of TAT dollars. The allocation was set at 44.8% of total TAT collections which allowed the number of dollars each county received to grow as the overall collections grew.

That sharing of the growth in collections came to an end this past year when the legislature capped the total number of dollars to be shared with the counties at $93 million. Now it seems the state legislature would like to get its hands on that pot of money while throwing the counties into the fire by allowing the counties to raise the general excise tax rate to replace those funds. In the end there is only one loser - the taxpayer.

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