Counties begin to get equity from state

The first — but only the first — step toward fairer fiscal treatment of Hawai‘i’s four counties was finally reached this week in an out-of-court settlement between the counties and the state.

After years of haggling, the state agreed to let the counties keep a portion of the public service company taxes imposed on utilities such as the telephone and electric companies.

The public service tax is a state imposed tax that is supposed to operate in lieu of county property taxes. The counties argued that they were losing out, since they could not impose property taxes on utilities and the state kept the entire public service tax.

In an out-of-court settlement, the state has agreed to let the counties keep public service taxes equivalent to what they would have collected in property taxes. Today, that adds up to something like $30 million a year for the four counties, of which Honolulu would get the bulk.

To make the settlement final, the Legislature will have to rewrite the public service tax to account for the portion now going to the counties. It should do that at once.

But that is only the first part of what should be a broader effort to give the counties fairer tax treatment. The next step should be to rationalize the treatment of excise taxes paid by the counties.

Today, the four county governments must pay excise taxes to the state (that 4 percent tax) on all their purchases. The state returns some of the money in the form of grants and other state help.

But there are no guarantees. And the system is terribly inefficient.

It would be much simpler to just exempt the counties from paying state excise taxes on their purchases. Even if state support for the counties was reduced by an amount equal to the savings, there would be efficiencies that would benefit all taxpayers.

The current system is a vestige of a day when the counties were little more than political wards of the state. It is time to get rid of it.

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