The half percent rail surcharge on Oahu’s general excise tax was sold to the public as a temporary tax increase to end Dec. 31, 2022.
But this legislative session, the city will be back at the table to urge lawmakers to continue the half-percent rail surcharge forever.
The city says it needs the additional money to cover an anticipated $500 million to $700 million shortfall in rail funding because of lower general excise tax collections, construction delays and unexpectedly high construction costs.
Mayor Kirk Caldwell says the rail project must have an assured source of funding before future rail contracts can be signed.
What happened to all the Caldwell administration’s promises to bring rail in on time and on budget?
In a phone call Sunday, the mayor said when the original budget for rail was made, nobody projected the strong construction boom Oahu is experiencing today. He says the high demand for construction workers and materials is the main driver of today’s increases in rail costs.
“I wish the budget could have remained the same,” says Caldwell.
House majority leader Scott Saiki expects the city’s push for a permanent excise tax hike will spark more controversy than any bill this legislative session.
“It is going to generate a lot of discussion,” says Saiki.
“Of course it’s a tax hike. If the tax is supposed to end and it doesn’t, it’s an increase.” — state Sen. Sam Slom
And from City Hall, the proposal to keep the rail tax in perpetuity already has generated a lot of spin and obfuscation.
In a recent news conference, Caldwell denied that a permanent rail surcharge would be a tax hike. “We pay it right now and we’ve been paying it since 2007,” said Caldwell, “so it’s not an increase in the tax, it’s just continuing it beyond Dec. 31 of 2022.”
That’s nonsense. Playing with words. If Oahu residents were promised they would be free of the tax after 2022 and the tax is continued beyond that date, it is a tax hike.
“Of course it’s a tax hike,” says Republican Sen. Sam Slom. “If the tax is supposed to end and it doesn’t, it’s an increase.”
In our Sunday phone conversation, the mayor said this is “splitting hairs.” He stands by his contention that if taxpayers pay the rail surcharge for 15 years and are later informed they will have to pay it indefinitely, it is a tax extension not a tax increase.
No politician likes to talk about tax increases.
And it is important to point out here that even though the half-percent rail tax might sound small, mathematically, it is a 12.5 percent increase on the 4 percent excise tax.
The excise tax is not a sales tax as some residents mistakenly think, but rather an insidious surcharge that is piled on every product and service we purchase, from bananas to royalties to rents.
“It is very efficient,” says Tom Yamachika, president of the Tax Foundation of Hawaii and a columnist for Civil Beat.
“We pay it right now and we’ve been paying it since 2007, so it’s not an increase in the tax, it’s just continuing it beyond Dec. 31 of 2022.” — Mayor Kirk Caldwell
The Tax Foundation estimates each Oahu resident is currently paying an extra $200 a year because of the rail surcharge; for a family of five that’s $1,000 more shelled out annually. If you multiply that over the rail tax’s current 15-year life, that would mean a family of five would be taxed an extra $15,000 to help pay for rail.
Hawaii Kai senator Slom wonders when the push to raise more money for rail will stop.
Slom says, “If the city has a $700 million rail deficit now and the project is only 5 percent completed, what’s going to happen in the future?”
Slom predicts the proposal to make the rail tax permanent will fail to generate support even among Democrats in the Legislature.
But that depends on to whom you talk.
House Speaker Joe Souki, a longtime rail transit supporter, is personally in favor of a permanent rail tax surcharge.
Souki says, “to stop rail now, makes no sense, when so much has been done. The city is going to need a favorable cash flow necessary for the project. The Legislature supported rail to ease Oahu’s traffic. It can’t back away from it now.”
Souki also points out that removing the “sunset” from the rail tax doesn’t mean the tax will have to continue for eternity. He says in the future lawmakers can craft a bill to end the surcharge.
Senate President Donna Kim’s office said she was in meetings and unable to talk about her views on making the rail tax permanent.
But Senate Vice President Will Espero is in full support of making the rail tax surcharge go on forever, especially if the tax hike will pay for extensions to the planned 20-mile rail route.
“Most people would like to see the rail service continue from Ala Moana Center to the University of Hawaii at Manoa,” says Espero.
Another possible new rail spur would go into the heart of Kapolei.
Sen. Laura Thielen thinks other solutions should be considered before extending the rail tax indefinitely.
“At this early stage, we need to be certain the project is being managed properly and that the plan is cost effective,” says Thielen.
Thielen says another way to help the city resolve its rail budget shortfall would be to reduce the 10 percent the state currently takes off the top of rail tax collections to administer the tax, and to give some of that money back the city.
The state will take in about $400 million by 2022 as its payment for collecting the rail surcharge. The city says that’s a lot more than it costs the state Tax Department to collect rail tax revenue.
Yamachika of the Tax Foundation says, “We need to come to an understanding of how much money the state has ‘stolen’ from the city in the past for the rail tax collections and hand some of that money back to the city.”
It is wrong for the state to squirrel away excess money it is taking to collect the rail tax and to use it instead to bolster the state treasury. The public was told the tax was for the sole purpose of building Honolulu’s rail system, not sneaking extra money into the state general fund.
“At this early stage, we need to be certain the project is being managed properly and that the plan is cost effective.” — state Sen. Laura Thielen
In 2013, the Legislature considered a bill to reduce the 10 percent the state skims off the top to collect the rail surcharge tax, but the bill died.
Of course, the state is not keen to give up the extra rail tax money it is using to help balance the budget.
Mayor Caldwell says he will not ask the Legislature for a bill this year to reduce the state’s 10 percent take of the rail surcharge. He says that would be a “losing battle.” And, he says, it would not generate enough money to cover the projected deficit.
Other difficult issues lawmakers will face this session will center on pleas to bail out and privatize parts of the state’s public hospital system, a group of public hospitals and clinics, which is expected to be burdened with a $200 million deficit in fiscal 2016 and 2017.
Also, there will be controversy over requests for increased funding for the Hawaii Health Connector, the state’s insurance marketplace for Obamacare.
Other contentious issues will include renewed proposals to decriminalize or legalize marijuana, which key lawmakers told me will not advance. They plan to focus instead on legislation to finally set up dispensaries to distribute medical marijuana.
And some residents will be upset by requests for money to begin the process of moving the Oahu Community Correctional Center from its location in Kalihi — the path of the new rail system — to a new site elsewhere.
But no issue is going to spark as much controversy at the beginning of the 60-day session as the proposal to make Oahu residents pay for rail forever.