Taxpayers Sue Hawaii for Money Grab

by Rein M. Terrado, Court House News, October 23, 2015

HONOLULU (CN) - Hawaii has grabbed tens of millions of dollars from Honolulu County taxpayers and diverted it to the general fund, rather than using it for a mass transit rail project as intended, a nonprofit claims in a class action.

The Tax Foundation of Hawaii sued Hawaii on Wednesday in Oahu First Circuit Court.

"Under the pretense of collecting funds to administer a surcharge imposed solely on Honolulu taxpayers, the state of Hawaii since 2007 has kept tens of millions of dollars of this surcharge money in the state general fund," the complaint states. It calls this an "injustice" that has damaged Honolulu County taxpayers by more than $100 million, and "unless enjoined, will damage them by hundreds of millions of dollars more."

Hawaii's general excise tax was raised from 4 percent to 4.5 percent in 2007 to fund the Honolulu rail project.

House Bill 1309 , enacted in 2005 as Act 247, established a county surcharge on state tax to fund public transportation. The law says the county surcharge could be no greater than "one-half percent of all gross proceeds and gross income" from taxable items.

It also stated that the state finance department could "retain, from time to time, sufficient amounts to reimburse the state for the costs of assessment, collection, and disposition of the county surcharge on state tax incurred by the state." This money was to go to the state's general fund.

No other county but Honolulu has imposed a county surcharge of 0.5 percent through Ordinance 05-027 .

The Tax Foundation claims that the state Department of Taxation testified to the Legislature that administration of the surcharge would require "a one-time appropriation of $3.6 million for hardware, software and equipment and $2.5 million annually thereafter for recurring staffing and operational costs."

The Legislature then allocated " ten percent 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."

The Tax Foundation says the numbers don't add up.

In fiscal years ending June 30, 2012 to June 30, 2015, the Department of Taxation collected about $896 million in county surcharges: 10 percent of which would be $89.6 million to the state general fund.

During those fiscal years, the Department of Taxation had a total operating budget of approximately $98.2 million.

"This means that the 10 percent county surcharge diverted by the state during those fiscal years was between 87 percent and 100 percent of the entire amount expended by the state in assessing, collecting and disposing of all state taxes," the nonprofit says. (Emphasis in complaint.)

"These amounts grossly exceed the cost incurred by the state to assess, collect and dispose of the county surcharge funds."

Despite the gross disparity between the supposed $2.5 million annual cost of administrating the surcharge money, the state "continues to deposit and keep the entire 10 percent withheld from Honolulu into the state general fund."

Rather than diverting $89.6 million from the fund in the past four fiscal years, the state should have limited itself to $10 million, the nonprofit says.

"By deducting and diverting 10 percent of all Oahu surcharge proceeds collected without regard to the actual cost of assessing, collecting and disposing of the amounts collected ... plaintiff and similarly situated class members have been and continue to be required to pay a higher state tax than that imposed on state tax payers of other counties," the complaint states.

The foundation seeks class certification and an injunction ordering the state to withhold only the cost of administering the Oahu surcharge and pay the balance to the City and County of Honolulu.

The foundation is represented by Thomas Bush, with Alston Hunt Floyd & Ing in Honolulu.

Honolulu Mayor Kirk Caldwell said state appears to intend to keep more than $400 million in surcharges over the life of the project.

"It's a lot of money," Caldwell said.

The Hawaii Attorney General's Office declined to comment, but in a statement sent to state Sen. Samuel Slom in September, the deputy attorney general said the 10 percent collection from the surcharge is legal because the law says "shall," not "may."

"As used in statutes, contracts, or the like, this word is generally imperative or mandatory," the opinion letter states.

A proposal to reduce the state's share of the excise tax surcharge from 10 percent to 3 percent was filed in the Legislature this year, but failed.