Rail: Heads We Win, Tails You Lose

by Tom Yamachika, President Tax Foundation Hawaii

The tax bill moving through the Rail Special Session contains one provision that, to me, sticks out above the rest as a “Heads We Win, Tails You Lose” proposition.

As you may remember, the Tax Foundation sued the State, contending that the “10% Skim” that the State helps itself to off the top of the county surcharge collections is grossly excessive and unconstitutional. The suit is still pending in the court system.

The special session rail bill, SB 4, provides that if the Foundation wins and the State is ordered to refund money to the City, then the State will scoop the same amount of money from the City’s share of transient accommodations tax money, and keep it in the State general fund.

To understand what this is like, imagine if you were driving to work one day and a State vehicle rear-ends you. Crash! You incur $10,000 in damages, including car repair charges, medical bills, and the like. You sue the State. But before the judge can rule, the legislature passes a law that says if the court rules in your favor and you recover any money, there will be a special tax in the same amount that applies just to you, so that you must pay back every dime that the court says you are entitled to. “We need to protect the State’s revenue,” the legislators say.

Fortunately, our state constitution provides an answer: They can’t do that! It says, “No laws shall be passed mandating any political subdivision to pay any previously accrued claim.” A lawsuit is the classic example of a previously accrued claim. Party A says the State did something bad in the past. Party A then files a claim to ask the State to make it right. The State refuses, and Party A takes the case to the court system.

The historical records say that the framers inserted this provision “to curb some legislative practices found obnoxious by local units. One of these practices is compelling county government to pay accrued claims. This form of legislation it was urged, usurped the judgment of the courts and interfered unnecessarily with local affairs and finances. It was for the purpose of preventing such continued practice that the sentence, ‘No laws shall be passed mandating any political subdivision to pay any previously accrued claim,’ was incorporated into the provision on local government." Proceedings of the Constitutional Convention of Hawaii, vol. I, Committee of the Whole Report No. 21 (1950).

This provision was left intact through the Constitutional Convention of 1978, and is now in Article VIII, Section 4 of our constitution.

That lawmakers have even considered “heads I win, tails you lose” legislation is profoundly disturbing. Even more disturbing is that they passed it and it is expected to be signed into law.

To be sure, our state is not alone. Other states have recently used their legislatures to upend the civil justice system. We previously have written about a case in the State of Washington where the legislature nullified a taxpayer victory in court by rewriting the law 27 years retroactively. Retroactive tax laws that unwound taxpayer victories were also enacted in Michigan, Gillette Commercial Operations North America v. Michigan Dept. of Treasury, 878 N.W.2d 891 (Mich. Ct. App. 2015), and New York, Caprio v. New York State Dept. of Revenue & Taxation, 25 N.Y.3d 744 (2015). The U.S. Supreme Court declined to take up these cases, but of course that doesn’t mean the Court approved of them. It certainly does not make them right.

It’s been said that legislation is the art of compromise. But what possible compromise could have given rise to this provision? We elected our legislators to use their sense of justice and fairness, not to leave it behind when they walk into the Capitol.