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Battle Brewing Over Utility Real Property Tax

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By Lowell L. Kalapa

One of the unique features of the Hawaii tax structure is the tax imposed on public utilities which is imposed on companies regulated by the public utilities commission and is paid in lieu of the general excise tax.

While the tax imposed on these regulated companies is based on the gross proceeds of the company much like the general excise tax, it has two very different rate structures. Generally, most of these regulated businesses, such as trucking or bus companies, pay a 4% rate identical to the general excise rate. Some, like the electric, gas, and telephone companies, pay a higher rate that ranges from 5.8855% to 8.2%.

These latter businesses pay the higher rate largely because they enjoy an exemption from the county real property tax. This higher rate and exemption from the real property tax were seen as a way to avoid all the problems associated with attempting to assess or set a value on utility property which falls somewhere in the grey area between real property and personal property. While generally a real property tax is levied on the value of land and improvements or buildings, the difficulty arises when large machinery, such as a generator or a switching panel, is built in a part of the building. Does the real property assessor value the generator as part of the building or is the generator considered machinery and therefore personal property?

Similarly, imagine the difficulty the assessor would have trying to determine how to value a strip of land owned by a public utility so it can run its lines or pipes under or over that strip of land. And what about those little booster stations or cabinets scattered throughout the neighborhood? Early lawmakers saw the difficulty in assessing such property and thus combined the two taxes to impose a single tax on the gross receipts.

That approach to taxing utility property was fine and dandy in the days when all tax receipts accrued to the territory and later the state government. However, since 1978 the counties have been given complete control over the real property tax to do with as they pleased, that is, with the exception of the tax on utility property.

For years the counties asked to be compensated for the fact that seemingly they could not tax utility property under the property tax exemption in the state law. And for years, the state has argued that because efficiency of taxing utilities under the public service company law outweighed the administrative difficulty of the real property assessment process, they could continue to impose the tax in lieu of the real property tax. Although there was almost a resolution to this issue where the state contemplated giving the counties some sort of revenue sharing, that attempt went up in smoke when the state revenue picture soured.

Apparently tired of this verbal jousting, one county has gone to court to challenge the state’s claim that it can grant exemptions from the real property tax for public utility companies. While the decision in the case is far from being made, it appears that the county has a valid argument. And some on the state’s side share that opinion as legislation is being prepared to delete any mention of a real property tax exemption from the public service company tax statute.

However, no mention is being made of lowering the tax rate should that legislation be approved. Thus, while the state may roll over and give up trying to grant the property tax exemption, it does appear they are not willing to give up the higher rate on the taxpayer, the utility company. After all, it is estimated that the incremental higher rate generates over $20 million a year for the state. Why would state lawmakers want to give up that kind of money?

As a result, if the counties are allowed to impose the real property tax on public utilities while the state continues to tax those same utilities at rates higher than 4%, that added cost will be passed on to the consumers of energy and telecommunications services. From a utility’s standpoint, the added cost will just be passed along to the customer as the utility’s rates are regulated and taxes remain a cost that can be recovered in the rate charged the customer.

The counties will get their real property tax revenues and the state won’t lose a dime. The only loser in this passing of the buck is the customer/taxpayer. If the counties indeed have the right to impose the real property tax, then the state should reduce its utility tax rate to the same 4% paid by all other businesses in the state. Allowing the higher utility tax rates to continue amounts to nothing more than a tax increase.

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