Would You Be Shocked?

by Tom Yamachika, Interim President, Tax Foundation of Hawaii

When most of us pay at the gasoline pump, we know the prices are very high relative to the mainland. Part of the problem is the different taxes that are imposed on fuel. We are actually going to talk about something else, but we will return to this later.

What you may or may not have heard is that Hawaii's power prices are among the highest in the nation as well. Not surprisingly, one of the big reasons for this is taxation. Hawaii power companies pay some taxes you have probably heard of, and others which you probably haven't.

For starters, Hawaii power companies do not pay our ubiquitous General Excise Tax (GET). Instead, they pay the Public Service Company Tax (PSCT), which is imposed on gross income (that is, there are few allowable deductions), similar to the GET, but the rate is higher. The rate of tax varies between 5.885% and 8.2% depending on the profitability of the power company. Four percent of the gross income goes to the state and the rest goes to the counties. The reason for this set-up is that power companies typically have lots of property and real estate interests that are hard to value, such as the right to run power lines through, over, or under property. This tax was adopted in 1932, when the state was in control of taxes on for-profit enterprises as well as taxes on property. So the PSCT was imposed on utilities instead of the GET and the real property tax. The 1978 Constitutional Convention decided, with the voters’ approval, to give the property tax over to the counties. So now that the real property tax belongs to the counties, it is, of course, fair that they get a piece of the PSCT.

Next, the state Public Utilities Commission charges a fee to utilities. It is 0.25% of gross income, but is paid twice a year for a total of 0.5% of gross income.

But that's not all. Our power companies also pay the Public Utility Franchise Tax, which is an additional 2.5% of gross income. This tax is imposed by state law, but, curiously enough, it is all paid over to the county.

Then, of course, power companies pay federal and state income taxes like pretty much every other business.

But the fun doesn't stop there. Most of our power companies produce some power by using renewable energy sources, but the reality is that most of it is produced by burning petroleum products. There are additional taxes on petroleum products, as mentioned at the beginning of this article. There is a fuel tax of 2 cents per gallon on diesel fuel, naphtha, and other off-highway fuels. There is the environmental response tax, also known as the barrel tax, which is imposed at $1.05 per barrel of imported petroleum products (although that tax rate was supposed to be temporary, it was recently extended by a law just passed and signed last month).

All of the above are some reasons why our power prices are shockingly high.

One avenue of relief is presented by a proliferation of alternative power producers. So far, most of the taxes applicable to Hawaii power companies don’t apply to alternative power. But at the same time, most alternative power is not always on – solar power isn’t generated at night and wind power shuts off when the wind stops blowing. If an alternative power producer sells wholesale power to a utility, the alternative producer gets taxed and then when the utility resells it most of the taxes described above still apply to the utility. And if the alternative producer draws power from the utility during down times and sells it to retail customers, the alternative producer pays retail rate taxes and the utility does too.

So, state and county lawmakers? With more awareness of these issues, can we challenge you to come up with “current” solutions without “static”?

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