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The Honolulu Advertiser
Posted on: Thursday, July 31, 2003

County tax authority a worthwhile concept

Hawai'i has an antiquated system of governance in which the four counties — ostensibly independent political entities — are really only as independent as the state Legislature wishes them to be.

In a variety of areas, the counties must operate under state laws and standards.

One of the most dramatic examples of this is the inability of the counties to impose taxes other than the property tax. If a county wanted to impose, say, a sales or excise tax or some form of income tax, it could not do so without legislative permission.

And traditionally, state lawmakers have been reluctant to grant that permission. If there are untapped tax resources out there, legislators want to keep them firmly under their control.

That appears to be changing. A bill to grant the counties authority to impose a 1 percent (penny on the dollar) sales tax was given serious consideration at the last legislative session and won the endorsement of Gov. Linda Lingle, a former mayor.

And lawmakers this week held another hearing on the proposal, trumpeting it as a fresh effort to grant greater home-rule authority to the counties.

In general, county officials appear to support the idea. But the truth of the matter is that this optional tax authority would be accompanied by a sharp reduction in the amount of hotel tax revenue the state shares with the counties.

Technically, the state does not have to share anything; it is a state tax. But it does, in part because the counties take on expensive duties in service of our visitor industry such as police and fire protection, sewer service, parks and the like.

Under a proposal discussed this week, Honolulu would lose its entire $37.3 million hotel tax share while the Neighbor Islands would give up half.

So in some ways this is a dubious favor: The state gets to collect more tax income while the counties are forced to make up the loss by imposing their own tax.

Still, there may be some value to this. Honolulu would gain about $120 million a year with a 1 percent sales tax while losing that $37.3 million. It could make up the hotel tax loss with less than one-third of the new sales tax and use the rest to take some of the pressure off property owners and other residents.

Perhaps the largest problem is that a sales tax is, by definition, regressive. It the counties come out ahead in this tradeoff, they should use some of the money gained to ease the burden of city charges and fees on lower-income families.