Posted on: Thursday, April 28, 2005

Senate's plan: Raise excise tax statewide

By Derrick DePledge
Advertiser Capitol Bureau

In an unexpected shift in power, state senators suggested yesterday that the state, not Honolulu or the Neighbor Islands, raise and collect an increase in the general excise tax to pay for mass transit.

The state would send portions of the money back to the four counties for transit projects. But some of the new revenue would also be used to offset the cost of raising the standard income tax deduction, which would exempt a greater share of personal income from taxes and remove thousands of low-income people from the tax rolls. The rest of the money would go the state's general fund.

The proposal caught many people off guard because it is a radical move away from a belief throughout the session that counties, not the state, would have the choice to add the surcharge. State House leaders were surprised and indicated they would likely counter the move when conference negotiations resume this afternoon.

Others worried that, given the timing, it might be an attempt by some in the Senate to kill a tax surcharge. The Senate had previously recommended allowing counties to add a 0.5 percent surcharge to the state's 4 percent general excise tax, while the House had approved a 1 percent surcharge. Lawmakers have to finish negotiations by Friday to position bills for final votes next week.

"I prefer not to get things complicated at this point when we get this close to what I believe is going to be the solution to deal with the coming transportation crisis," said Honolulu City Councilman Nestor Garcia, who believes counties should have the option to raise the surcharge. "I thought that was what we had all agreed upon from the fifth floor on down," he said of the governor and the Legislature.

Gov. Linda Lingle has said she supports giving counties the choice to add a surcharge, as a right of home rule, but has opposed any new statewide tax increase.

The excise tax is charged on almost all forms of consumer and business activity. A tax increase would help counties pay for transit projects to respond to the state's growing traffic congestion. State lawmakers have been told they have to act this session for Honolulu, which is considering a new rail line, to qualify for federal money for the project in a six-year transportation bill now before Congress.

Honolulu Mayor Mufi Hannemann said he wants the right to add a 1 percent surcharge, which would bring Honolulu an estimated $300 million a year for mass transit and, he believes, put Honolulu in a stronger position with the federal government.

A rail line between Kapolei and Iwilei could cost about $2.6 billion and U.S. Sen. Dan Inouye, D-Hawai'i, informed the mayor this month that the federal government's contribution would likely not exceed 50 percent.

"Right now, I'm looking for whatever gets me that local funding mechanism," Hannemann said. "We're so close to it."

Neighbor Island leaders also reacted sharply yesterday to the Senate's proposal. "Talk about surprise — that wasn't even being discussed," said Big Island Mayor Harry Kim, who has said he would not raise the surcharge on the Big Island if given the choice.

Big Island Council Finance Committee Chairwoman Virginia Isbell also said she is against the idea. "That doesn't make good sense to me. I would have to oppose that," she said. "I think it's wrong to put in a statewide tax when we didn't ask for that. Our property tax is just fine; I don't think that we should be taxing our people any more."

Maui County Council Chairman Riki Hokama said he would prefer that each county have the option to establish the surcharge and it not be restricted to transportation. Gary Heu, administrative assistant to Kaua'i Mayor Brian Baptiste, said Kaua'i also wants similar flexibility.

"That flexibility is never a bad thing. If you really take that flexibility away from the counties, and if the money is restricted to transportation, I don't know how we would be able to support that," Heu said.

Mac Lowson, the president of the Hawai'i Association of Realtors, which has waged an extensive media campaign against a tax increase, predicted that the Senate proposal will anger much of the community.

"Personally, I do think that this will galvanize the populace of the state more and make them stronger against the tax," Lowson said. "Because I don't think they really want the tax. Some people may want the transit system but they haven't looked at the alternatives of where they can get the money and how they can finance it. This is just the easiest way to get there."

But other business leaders who opposed a tax increase have changed their minds. The Chamber of Commerce of Hawai'i, finding that traffic congestion has a negative impact on the economy and the quality of life, now supports giving counties the choice to add a surcharge if the money is restricted to transit projects.

"We don't believe we can wait another six years for the federal funding cycle to come around," said Jim Tollefson, the chamber's president.

Under the Senate proposal, a 1 percent surcharge statewide would raise between $400 million and $428 million a year. But counties would get less tax revenue than if they were to raise the surcharge at the county level, since the state would provide a fixed amount to the counties for transit, use some of the money for tax relief and keep some for the general fund. Honolulu, for instance, would get $150 million a year instead of the estimated $300 million.

State Sen. Brian Taniguchi, D-10th (Manoa, McCully), the chairman of the Senate Ways and Means Committee, said the state is better prepared to collect a tax surcharge than counties. He said he wants some sort of tax relief as part of the package to help low-income people deal with the tax increase or he will hold out for a 0.5 percent surcharge instead of 1 percent.

The Senate's initial version included a tax credit weighted to the poor but Taniguchi now suggests raising the standard deduction, which has also been a priority for Lingle and Republicans this session. "It would pretty much cover the same types of people," Taniguchi said.

House Majority Leader Marcus Oshiro, D-39th (Wahiawa), said he was surprised by the proposal but hopes the House and Senate can reach agreement on what has become an important quality of life issue. "It seems that the stars had all aligned," he said. "This might be the best opportunity to make a decision about transportation."

Republicans attacked the Senate idea as a blatant grab for more tax dollars, since the state general fund could receive between $160 million and $188 million in new revenue. Senate Minority Leader Fred Hemmings, R-25th (Kailua, Waimanalo, Hawai'i Kai) called it "one of the most insidious and disingenuous proposals ever."

Staff writers Gordon Y.K. Pang, Kevin Dayton, Jan TenBruggencate and Timothy Hurley contributed to this report. Reach Derrick DePledge at ddepledge@honoluluadvertiser.com or 525-8070.