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The Honolulu Advertiser
Posted on: Sunday, December 10, 2006

Here comes tax increase, ready or not

By Mike Leidemann
Advertiser Staff Writer

ON THE WEB

http://www.state.hi.us/tax/

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As the City Council prepares to take a final vote this month on a multibillion-dollar rail project, consumers, merchants and state officials are gearing up for the Jan. 1 start of a tax increase to help pay for it.

For months, state officials have been meeting with trade organizations, contractors and groups to answer concerns and questions about the rules and regulations governing the tax surcharge, which will increase the cost of almost all goods and services on O'ahu for the next 15 years.

"We've been doing everything we possibly can to get the word out. We're ready to go live Jan. 1," said state Tax Director Kurt Kawafuchi.

Meanwhile, business groups are trying to spread the word to thousands of their members. Despite the education campaign, at least some businesses are likely to be caught off-guard by the new tax regulations, business leaders said.

"There's bound to be a little craziness out there for a while. At least some people are going to say 'Huh?' when they start getting the forms that reflect the new tax," said Carol Pregill, head of the Retail Merchants of Hawaii.

The tax surcharge, passed by the state Legislature last year to help fund a rail transit project on O'ahu, will raise the current 4 percent rate general excise tax to 4.5 percent a 12.5 percent increase. Businesses will be allowed to charge customers up to 4.712 percent.

Private and government officials estimate that the new tax could cost a family of four about $450 a year; city officials said the tax could raise between $150 million and $239 million a year to pay part of the cost of the proposed rail line, expected to cost between $3.8 billion and $4.6 billion, depending on which route the City Council chooses later this month.

No one, however, is certain about the true costs and benefits of the tax increase, the biggest in Hawai'i in the last four decades.

"The truth is that nobody knows what's going to happen. Anyone who tells you they can predict the results within $100 million is just not being honest," said Lowell Kalapa, head of the Tax Foundation of Hawai'i.

Kawafuchi said this will be the first time that a state tax will be leveled at different rates depending on where it's collected. That's created a number of challenges as officials struggled to come up with rules and regulations administering the tax, he said.

"Anytime you have a new tax law, there are going to be things coming up. It's hard to right one-size rules to fit all. We've tried to address everything we can think of, but I'm sure there will still be some things we haven't thought of yet. We invite people to write or call us with their own questions," he said.

DEVIL IN THE DETAILS

While the increase sounds straightforward enough, details have been devilish, business leaders said.

For instance, while the tax increase in the statewide excise tax only applies to O'ahu, the state has ruled that all companies selling products here even those based on the Neighbor Islands will have to pay the tax. So will O'ahu-based companies doing business primarily on the Neighbor Islands. For real estate transactions, the tax will be based on where the property is located; for most other commission-type sales, it will be based on the location of the agent.

"It's creating a lot of inconsistency and a raising a lot of new questions," Kalapa said. "Some companies are going to consider restructuring or moving their operations to avoid the tax."

"We've talked to a lot of businesses, and they're really not ready to deal with all the specific technical questions that have started to come up. Everybody has a situation they haven't thought of yet, so a lot of them are just going by the seat of their pants," said Sam Slom, head of Small Business Hawai'i and a state Republican senator who vigorously opposed the new tax.

Slom noted that a new minimum-wage law and other new fees also will kick in at the beginning of the year.

"It's going to be a real difficult situation," Slom said. "One thing that's absolutely certain, it's going to raise the cost of doing business in Hawai'i yet again and will absolutely have an impact on the standard of living for families."

The city's alternative analysis plan for mass transit estimates that the excise tax surcharge could generate between $2.6 billion and $3.2 billion over its 16-year life span, enough to provide the lion's share of funding needed to build a 20-mile elevated rail line from Kapolei to Ala Moana.

Since the figures are just estimates, there's wide disagreement over how close they will come to reality.

"If the economy stays strong, we could end up with an even higher figure," Mayor Mufi Hannemann said.

PREDICTIONS DISPUTED

Kalapa disagrees. The tax surcharge could have a negative effect on the state's economy, driving the tax base down, he said.

"The figures are a real joke. The predictions are overly optimistic," he said.

If the City Council chooses the longer, $4.8 billion route from Kalaeloa to the University of Hawai'i-Manoa, officials estimate that the surcharge income and federal funding would still leave the city about $1.2 billion short of full funding. That money might be made up through other sources, including the selling of development rights around transit stations.

Reach Mike Leidemann at mleidemann@honoluluadvertiser.com.