UPDATED 4/22/11 at 9:30 a.m.

The Hawaii Legislature knows how to strike a deal.

Of the $681 million raised by Honolulu’s rail tax to date, the state has kept 10 percent, or $68 million.

The money is used by the Legislature to “collect and assess” the tax by the state Department of Taxation, according to 2005’s Act 247, which authorized the surcharge.

But some Honolulu officials – or one, anyway – says the state is taking advantage of Oahu taxpayers.

“Long story short on this, is that each and every year since 2007, the state has been profiteering off of the rail surcharge, placing such money into their general fund to balance their budget of which is used and expended,” Honolulu City Council District 1 Representative Tom Berg told Civil Beat.

This week Berg found support for his argument in a Dec. 2008 Tax Department report. He said he hadn’t seen it before unsuccessfully arguing last week that the council should ask the state to return excess money not needed to process the tax.

The tax was authorized in 2005. Act 247 1was allowed to pass into law without former Gov. Linda Lingle‘s signature, to fund “public transportation systems.”

Honolulu used the act to raise the General Excise Tax by 0.5 percent to help pay for the city’s proposed rail project.

  1. A previous version of this story said that former Gov. Linda Lingle signed Act 247 into law. This was incorrect. Lingle allowed the act to become law without her signature.

Former Honolulu Mayor Mufi Hannemann brokered a deal with Lingle to have the state collect the tax, which went into effect in 2007.

As a stipulation of the deal, the state would keep 10 percent of all generated funds in order to “reimburse the State for the costs of assessment, collection, and disposition,” according to the act.

But as it turns out, the Hawaii Department of Taxation requires far less than the 10 percent it takes to assess the tax.

According to the 2008 Department of Taxation Annual Report detailing the level of staffing and funding necessary to “administer the county surcharge collections,” the total amount budgeted for fiscal year 2008 came to $749,876. For the following fiscal year, the department budgeted $700,508.

The money was used for 19 permanent positions and four temporary positions in FY 2008 and 19 permanent positions and one temporary position in FY 2009.

In just 18 of those 24 months, from Jan. 1, 2007 through June 30, 2008, the state kept a total of about $24.2 million from the $241.7 million tax collected.

But over the two-year period, the Department of Taxation only required about 0.6 percent, or $1.5 million, for salaries.

Yet, when the Department of Taxation made an additional request for $233,000 for computer support “needed to administer the County Surcharge tax,” the request was denied by the Legislature.

Berg says that the excess money placed in the general fund not needed by the Department of Taxation goes to projects on other islands.

“It’s not dedicated, it’s not earmarked,” Berg said. “So the fact that it goes into the soup, of the plasma, the blood of the taxpayers, it feeds all the neighbor islanders’ needs.”

On April 14, Berg introduced a resolution “Urging the Hawaii State Legislature to Provide the City and County of Honolulu all proceeds of the County Surcharge on state excise tax not needed to administer the surcharge.”

But only Council member Ikaika Anderson and Council Chair Nestor Garcia voted with Berg to pass the resolution. (Garcia voted with reservations.)

When Civil Beat asked House Speaker Calvin Say whether the Legislature would consider such a proposal, he replied: “At this point, no, because we’re short of cash too. I’m not going to BS you, I’m just going to give you a straight answer because we’re even looking at capping the TAT. So everything is fair game while we’re in session.”

Say said there is nothing unethical about sending Oahu taxpayer monies to other islands, because when neighbor island visitors come to Honolulu, they pay that same tax as residents.

Berg emphasized that this is not a pro-rail, anti-rail issue.

“This thing is not about being pro-rail or anti-rail,” Berg told Civil Beat. “I’ve heard people who are anti-rail saying, ‘Good, I don’t want the money going to the rail.’ That is not what this is about. It has to do with the principle of government, that’s why I’m a Tea Partier. It has to do, not with political affiliation… What we have here is an example of bad government. Government acting in bad faith. Government fleecing and profiteering in bad faith. And I’m calling them out on it.”