The state of Hawaii is taking more money than justified out of a general excise tax surcharge for Honolulu’s troubled rail project, according to a University of Hawaii report released Thursday.

Since 2007, the City and County of Honolulu has tacked on a 0.5 percent surcharge to the excise tax to pay most of the cost of a 20-mile, 21-station rail line from East Kapolei to the Ala Moana Center.

State legislation authorizing the surcharge calls for the state to retain 10 percent of the proceeds, presumably to cover its administrative costs — often referred to as “the skim.”

The troubled Honolulu rail project faces an uncertain future.

Ryan Ozawa

But the amount the state actually gets far exceeds those administrative costs, according to the report by James Mak, professor emeritus of economics at the the University of Hawaii Economic Research Organization.

“Hawaii’s State Government has unnecessarily profited from the Honolulu rail project,” the UHERO report concludes.

In fact, since the 2011 fiscal year, state revenue generated by the surcharge has surpassed the total budget of the Department of Taxation, which collects all state revenues.

In fiscal year 2015, for instance, the state got $24.9 million from the skim. That year, the total operating budget of DOTAX was only $20.7 million.

The report notes that Honolulu’s rail tax surcharge consistently adds up to less than 4 percent of overall DOTAX collections. It says that DOTAX has never conducted a thorough study of its real costs for administering the Honolulu surcharge.

State Take Far Surpasses What Other States Charge

Several states don’t charge anything for collecting local taxes, according to the report. Among 10 states included in a recent survey, for instance, Arizona, Illinois and Kansas charge nothing. In the states that do take a cut, the range is between 0.5 percent and 3 percent – far below Hawaii’s 10 percent take.

“It is time for State lawmakers to rethink the 10% administrative fee,” the report concludes. “Right now, it is exorbitant. A more reasonable fee is between 0.5% and 1.0%.”

The report comes at a sensitive time for Honolulu’s rail project.

The general excise tax surcharge that was supposed to pay the bulk of rail project costs has fallen short. The most recent estimates put the cost, including financing, as high as $9.5 billion, leaving the project with a shortfall approaching $2 billion.

Just two years ago, city officials persuaded lawmakers to approve a five-year extension, from 2022 to 2027, to cover surging costs. But estimates have continued to increase, and city officials are now asking the Legislature to approve an extension of the surcharge in perpetuity.

Senate Bill 938, now being considered by the Legislature, would eliminate the 10 percent cut for the state altogether.

House Speaker Joe Souki said he also believes that 10 percent is too high and has introduced legislation, House Bill 349, to pare it back to 5 percent.

“We’ve been doing it long enough,” he said. “Now we should be more realistic.”

But Honolulu Mayor Kirk Caldwell told lawmakers this week that he was prepared to go in the opposite direction by increasing the state’s cut, a move that might make the extension more palatable to skeptical legislators.

A Caldwell spokesman declined to comment on the UHERO report.

Meanwhile, the Tax Foundation of Hawaii is supporting the bill to get rid of the state skim. The foundation sued the state in 2015 over the state’s cut.

In written testimony on SB 938, the foundation wrote that “the diverted money amounted to a hidden State tax unwittingly paid by Oahu residents and businesses — and only them, even though the tax goes straight to the general fund to be used for projects benefiting the entire State.”

The foundation argues that the 10 percent skim is “a contributing factor to the financial woes of the City and County of Honolulu.”

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