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Errant Actions Could Cost Everyone More

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By Lowell L. Kalapa

Two issues involving transportation seem to have beset lawmakers as they try to resolve some knotty issues involving air and sea transportation.

The problem confronting the local airlines and the leasing of their aircraft seems to have been clouded by the charge that taxpayers should have to pay their taxes and the media casting the local airlines in the role of trying to get away with murder by not paying “their” taxes. Unfortunately, in the haste of trying to report the story, the local media missed some of the minor but very important details.

But first let’s understand the facts. A bill is currently making its way through the legislature that would exempt the rent income received for leasing aircraft equipment used for commercial purposes, that is flying passengers and cargo. Initially the bill was introduced because one of the local airlines is in the process of updating its fleet of aircraft and is investigating the possibility of leasing rather than buying the aircraft.

However, as the bill was being heard, it came to light that another local airline had been audited and the department discovered that the lessor of the aircraft, leased to the local airline, had not paid general excise taxes on the lease rent income. And while the lessor may not have thought it was subject to the local tax as they are located on the mainland, the department’s interpretation is that since the equipment which is owned by the lessor entered the state, it was just as if the lessor was located in the state and therefore subject to general excise tax on the lease rent.

Note well, that unlike the characterization by the local media, the taxpayer owing the taxes is not the local airline but the lessor or owner of the aircraft equipment. Where the spotlight shifts to the local airline is the fact that the lessor can make the local airline pay for the taxes due as a result of an indemnification clause in the lease contract.

Thus, while the local airline is not the taxpayer it will end up paying that cost. But wait, let’s get this straight, contrary to the characterization of the local media, it is not likely that the local airline will absorb this cost. By no means, the local airline will have to recover the cost by raising its rates to people who ship cargo and to passengers who will see the cost of an interisland ticket rise. And while from a tax policy perspective this may not be a good idea, from an economic and cost vantage point, it makes little sense to increase the cost of air transportation where travel by air is essential to the commerce of the state.

As businesses struggle to recover from the longest recession in the history of the state, it is curious that state government should be so insistent that this taxpayer pay his taxes. It is almost as if lawmakers and tax officials don’t care what impact it will have on the farmer in Waimea or the protea grower in upcountry Maui or the baker in Kilauea. Nor does it seem to sink in that the cost of travel between the islands will rise.

The other issue that will have a long-term impact is the earmarking of a tax for the purpose of building cruise ship facilities. A portion of the public service company tax which supposedly is to be paid by new cruise ships sailing in Hawaii waters would be put into a special fund instead of the general fund. While supporters believe that building such facilities will spur new economic activity, especially on the neighbor islands, it is not the worthy purpose, but the means of financing.

Not only does earmarking public service company tax violate the intent of the general fund spending ceiling, but it creates the same problems that the earmarking of the general excise tax for schools did nearly a decade ago. It removes the funds from the control of the legislature and sets it beyond the reach of lawmakers who should be setting the priorities for state tax revenues.

As a result, when schools go begging for funds for classroom teachers or supplies, the money that could have been spent on textbooks and teachers will be building cruise ship facilities. And if the building of those facilities doesn’t keep up with the influx of revenues, those unused revenues will just sit there until it is time to spend it on the cruise ship facility. This will occur while lawmakers try to figure out how to fund the Felix consent decree or pay for the state hospital system.

These are knotty issues in transportation that will take political will to solve. The question is, does the legislature understand the problem and do they have the political will?

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