Necessary and proper
From Horns of Jericho Blog, October 22, 2015
Elected officials are engaged in a free-for-all, looking at the rail tax surcharge to fund their next pet project. Sylvia Luke wants it as a slush fund to purchase Ali’i Place. Ernie Martin wants it to build affordable housing. Dan Grabauskas wants to be sure the money goes where it was intended – building rail. These elected officials rely on the fact that the average Joe/Jane Q. Citizen will not go back to the law (Act 247, 2005) to vet their proposals, and to use the smell test to establish whether it is indeed male bovine excrement. [1]
That’s why we’re here. By popular request, we will be performing the “smell test” on all of the latest rail tax developments. Keep in mind, questions of law are best answered by someone with a background in law. But while I am no expert, it only takes a few minutes to read Act 247 and half a pot of coffee to figure things out.
The law is explicit: money is for rail only.
When the law was drafted, it was anticipated that elected officials of various colors would attempt to raid the money for their own pet projects. Language was added specifically to prevent this, earmarking Oahu’s portion:
(c) Each county with a population greater than five hundred thousand that adopts a county surcharge on state tax ordinance pursuant to subsection (a) shall use the surcharges received from the State for:
(1) Operating or capital costs of a locally preferred alternative for a mass transit project; and
(2) Expenses in complying with the Americans with Disabilities Act of 1990 with respect to paragraph (1).
This language is very telling. It can only be used as an “alternative for a mass transit project”; it cannot already exist. The term of art is that the money is “encumbered” – it must be used for a very specific purpose, and no other purpose. Rail tax revenue cannot be used for TheBus or HandiVan services. But nowhere in that language does it permit rail tax revenue to be used for affordable housing.
While Ernie Martin can say whatever he wants in the media to support his bid for mayor in the coming election, his proposal does not pass muster. Either he knows that the law expressly forbids this (and is wasting taxpayer money by even suggesting this alternative) or is ignorant to this reality. Treachery and ignorance (whichever it is) are not qualities becoming of the City Council Chairman, let alone someone aspiring to be Mayor.
Ernie Martin fails to pass the smell test. His proposal to cap the amount of money for rail is similarly misguided. Suppose you went to Lowe’s in Waikele looking for a garage door remote with a budget of $20, but the only model on hand costs $21.00. Common sense is to purchase the remote and get on with your day. Ernie Martin would have you drive down to the Home Depot in Pearl City or do without it altogether. While going beyond budget is always distasteful (and should be minimized), overage can sometimes be justified. The only difference between the garage door remote and rail transit is the scale of the project.
Interestingly, media outlets failed to conduct their smell test. Had they done so, headlines would be much different.
The state MUST take 10% of the rail tax revenue.
The law is also very specific:
Out of the revenues generated by county surcharges on state tax paid into each respective state treasury special account, the director of finance shall deduct ten per cent of the gross proceeds of a respective county’s surcharge on state tax to reimburse the State for the costs of assessment, collection, and disposition of the county surcharge on state tax incurred by the State.
By law, the state is required to take ten percent of the rail tax revenue. Had the authors of HB1309 (CD1, 2005) intended for the state to take only what it needs, the language would likely have stated “shall deduct not more than ten per cent”. As absurd as it sounds, my reading of Act 247 indicates that administration of the rail tax should equal ten percent of the revenue it generates. That’s a lot of bureaucrats for a very simple task that requires a checkbook and a calculator. In this sense, the Attorney General’s position is absolutely right.
Necessary and proper
However, for the Attorney General’s position to remain consistent, any excess revenue from the 10% must be used toward administration of the rail tax. It cannot be used to fund air conditioners for public schools because the money is encumbered. However, could it be used to modernize the tax collection system used by the Department of Taxation (DoTax). The antiquated tax system, after all, is used to collect the rail tax surcharge?
This is what Sylvia Luke and Jill Tokuda (the two money chairs in the Legislature) are counting on. Since money from the rail tax can fund the DoTax, they can use money that customarily was allocated to DoTax on other pet projects, like purchasing a plush downtown office building (Ali’i Place).
If I were the Tax Foundation, I would focus less on the “10%” language and argue that the state is restricted to utilize only what is “necessary and proper”. From Act 247, 2005:
For the purpose of this section, the costs of assessment, collection, and disposition of the county surcharges on state tax shall include any and all costs, direct or indirect, that are deemed necessary and proper to effectively administer this section and sections 237- and 238-.
Modernization of the tax collection system is neither necessary nor proper because the rail tax can be administered without the modernized system. While it would be nice, it is neither necessary nor proper. [2] The attorney general, Sylvia Luke and Jill Tokuda would be hard pressed to demonstrate that $160-million (as noted in today’s HSA) is the total cost to administer and distribute rail tax revenue, but they benefit from the ambiguity of Act 247.
While the state is required to take 10% of the rail tax revenue, they are also bound by the “necessary and proper” clause and only permitted to utilize what is “necessary and proper”.
Nothing new…
The astronomical portion the state takes to administer the rail tax is nothing new. Fiscally-minded legislators have introduced many bills the past several sessions to decrease the amount taken by the rail tax. The failure of both money chairs (Jill Tokuda and Sylvia Luke) to pass a bill out of conference committee to decrease the amount that the state skims off the rail tax demonstrates that they do not believe this is a problem. Besides, who wouldn’t want an extra $160-million to play with in their budget?
[1] While this blog is intended to be PG, sometimes you need to call it what it is. The euphemism was the best option.
[2] Imagine that I gave a friend $100 to purchase a spam musubi. The understanding is only the “necessary and proper” amount should be used to purchase the $2 spam musubi from 7-11. “Necessary and proper” does not entitle my friend to use the remaining $98 to purchase new tires for the bike that gets you there, even though that bike got you to 7-11 to purchase the spam musubi. To purchase the same spam musubi, that friend could have just walked to the store.
[3] Admittedly, my time commitments have not permitted me to evaluate the brief they have filed with the courts. Should I be wrong, I would happily correct or retract any inaccuracy.