It could cost the state at least $3.6 million to set up a new system to allow a private company to collect the general excise tax on behalf of the city and the state, said Kurt Kawafuchi, director for the state Department of Taxation.

And while Kawafuchi supports the idea, he may be one of the few.

For many others, a proposed agreement between the city and the state to privatize the collection of the general excise tax is the latest example of "bad public policy."

Under the proposal unveiled Wednesday during a City Council Budget Committee hearing, a private company would collect the 4 percent general excise tax and the city's 0.5 percent surcharge.

The proposal is in reaction to a deal made in July between Gov. Linda Lingle and the legislative leadership to give the county the authority to collect its own tax.

The city's surcharge was signed into law by Mayor Mufi Hannemann in August and will raise about $150 million a year to help pay for the proposed mass-transit system on O'ahu when the higher tax takes effect in January 2007.

Council member Ann Kobayashi, chairwoman of the Budget Committee, said the city does not have the capability to collect the tax. And under current law, it doesn't have to.

"It is premature to do a memorandum of agreement since the Legislature still has not taken action on authorizing the city to collect," Kobayashi said.

Others, like Councilman Romy Cachola, worry that the agreement could adversely affect government workers and collective bargaining. He said yesterday that he wants the state to continue collecting the tax.

But Randy Perreira, deputy executive director of the Hawai'i Government Employees Association, said the plan would have no effect on the existing government workforce. Instead, he said the proposal is "stupid."

"It's bad public policy to have a third party — the private sector — doing what is the basic and fundamental function of the government," Perreira said.

It is easier and makes more sense for the state to continue to collect the general excise tax, he said.

Council action on the proposal to privatize the collection of the surcharge was deferred at Wednesday's hearing by the Budget Committee. It will likely not be heard again until the Legislature is poised to change the current law, Kobayashi said.

As it stands now, the state would collect the surcharge, keeping 10 percent of it for administrative purposes, Kobayashi said.

While some are calling the proposed agreement to allow a private company to collect the general excise tax everything from premature to wrong-headed, not everyone is convinced it is.

Kawafuchi said yesterday that the agreement is preparation for when the surcharge collection function is ultimately transferred to the city based on an agreement between legislative leadership and the governor.

"We're proceeding on the deal that has been cut," Kawafuchi said.

He also said privatization would be a "win-win situation for everyone." Government workers are "overburdened" and the agreement would reduce the volume of work, he said. Businesses would win by writing one tax payment check to one place, he said.

But Kobayashi, a former state legislator, said the city doesn't need to make this agreement, at least not at this time. She said the deal between the legislative leadership and the governor was that the leadership would introduce the legislation to give the county the authority to collect tax.

"They can't say that the Legislature will pass it because you just never know. The leaders can't speak for the body," Kobayashi said.

State House Speaker Calvin Say said yesterday that the leadership can only agree to introduce legislation. Legislators will make up their minds whether to support it, he said.

In a memo to City Council members, Mary Pat Waterhouse, director of the city Department of Budget and Fiscal Services, said she anticipates that the Legislature will enact legislation transferring the responsibility to collect taxes to the county. She urged swift consideration of the request.

Kobayashi said she would support entering into some kind of agreement if the leadership were to say that the Legislature is poised to pass the measure.

"We're not taking any action until we hear from them," she said.

Reach Loren Moreno at lmoreno@honoluluadvertiser.com.