If You Don't Ask You Don't Get It

by Tom Yamachika, President, Tax Foundation Hawaii

Now that we are getting into the final stages of our legislative session, we are getting closer to a resolution on the two bills that are seeking to extend the life of the 0.5% Oahu county surcharge on our general excise tax.

Let's start with the scope of the project. The problem that caused Mayor Caldwell and HART CEO Dan Grabauskas to go to the Capitol in the first place was that HART had just started opening bids for construction of the rail stations and the numbers came in lots higher than expected. At that pace, they concluded, they might not even be able to award all of the contracts because the dollars have to be available before contracts can be awarded, and with the surcharge set to expire at the end of 2022 the pool of money is limited.

But between the Mayor’s office and the Capitol, these gentlemen figured that if they were going to have a hard fight anyway, they should ask for a few more things. After all, if you don't ask you won't get. So they said, first, we are going to need money to finish what we started. Second, wouldn't it be wonderful if the rail line were extended out to Kapolei in the west and to UH Manoa in the northeast. And, third, it would be even better if the tourists, who pay a large part of this tax, were able to provide an operating subsidy for this project. So may we please have an extension of the surcharge from 2022 to…forever?

The resulting bills and the changes that were made as they meandered through the legislative process, reflect that lawmakers are sharply divided. Some are not willing to approve any increase. Some are willing to grant a five-year extension so the City can finish what it started, but without any of the add-ons to the City's wish list. Others are willing to pass a 25-year extension so that the rail line can be built to Kapolei and UH Manoa. But there seems to be very little support for an extension into perpetuity, as there seems to be a lot of concern that the surcharge be used only for capital costs, not for operation and maintenance.

Then there is the part of the surcharge that the State is skimming. The State sweeps 10% of all surcharge collections into the general fund, ostensibly to reimburse the State for expenses incurred in collecting the tax for the City. However, as we have pointed out before, the 10% turns out to be a massive amount of money, amounting to around 85% of the Department of Taxation’s budget while the surcharge represents perhaps 4% of the total revenue collected. So, when the smoke clears, it looks like the State is pocketing more in general excise tax off Honolulu business than from similar business conducted on other islands. This is, we pointed out, a constitutional problem; the Star-Advertiser, in a January 25, 2015 editorial, agreed and also called for the “skim” to stop. However, there is nothing close to a consensus on what, if anything, to do about it. None of the Senate drafts bothered to change the State’s take to anything less than 10%, although one of the drafts earmarked half of it for transit oriented development. One of the House drafts changed the 10% to an unspecified amount, indicating some awareness of the problem, but no clear direction on how to solve it.

It’s probable that we won’t see anything that resembles a clear choice until a House-Senate conference committee hashes these issues out. Most of the negotiations that result in any conference draft, however, are conducted behind closed doors. So hold on to your wallets in the meantime and get ready to be surprised!

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