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Gnarled Problem Facing County and Utility Customers

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By Lowell L. Kalapa

One of the measures left on the cutting room floor at the state capitol may have serious financial implications for your phone, electric or gas bill come this time next year. Lawmakers failed to address the knotty problem which was raised on the Big Island where the county is poised to impose the property tax on public utilities.

Some readers might say, it is about time that public utilities start paying the real property tax and since when did they deserve a real property tax exemption? Well, that exemption does not come free to the public utilities. The story of why public utilities have that exemption goes back a very long way.

During the early 1930’s, when Hawaii was still a territory, government was under extreme pressure to find a way to underwrite government operations. The territory had been largely dependent on the property tax. However, with little urbanized property, the property tax base was rather limited and therefore did not provide an adequate base from which to generate public revenues. Like states on the mainland, Hawaii went through various exercises in search of a new revenue source. In particular, it was apparent that the property tax did not lend itself well to public utility property because of the difficulty in valuing utility property which can consist of not only land and buildings but switchboards, generators and pumps which could be considered real property but actually are personal property.

So in 1932 the legislature adopted a recommendation that the territory tax enterprises like the public utilities based on a gross/net income basis. This new tax was intended to be in-lieu of imposing the real property tax on public utilities. A few short years later, the territorial legislature decided a gross receipts tax was also a good idea for all other businesses as well and thus adopted the current general excise tax structure.

However, the public utilities were exempt from the general excise tax as the public utilities tax was the replacement for the property tax for utilities and the general excise tax was the replacement for the property tax for all other businesses. For the period from the 1930’s to well into statehood, the property tax played a relatively minor role in financing the territorial government being allocated largely to pay for local or county government expenditures. In fact, up until a few years after World War II, there was a maximum cap on how much the counties could raise from the real property tax.

But what is more important is that when the tax system was overhauled in 1965, other regulated industries, like ground transportation and interisland transportation, were added to the public utilities tax law, and the tax on the utilities was reiterated to be in lieu of the real property tax. At that time a higher rate was imposed on the public utilities starting at 5.885% ranging up to 8.2% while the other regulated industries were taxed the same 4% rate that was imposed on other businesses under the general excise tax law. The higher rate on the public utilities distinguished the fact that the tax was in lieu of not only the general excise tax but also the property tax as well.

What brings this all to a head is that in 1978 the Constitutional Convention turned the control over the property tax to the counties. And while there was an eleven-year freeze on all exemptions, nothing was done subsequent to the expiration of that freeze in 1989 to address the issue of whether or not the state could continue to exempt the public utilities from the real property tax, that is, until now.

The bill that lawmakers failed to approve would have shared a portion of the collections from the public service company tax with the counties in return for the counties abstaining from imposing the real property tax on the public utilities. The counties would have gotten what was generated in their respective counties from any rate greater than 4%.

But the bill failed largely because the attorney general believed the bill to be unconstitutional since the state has no right to dictate how the property tax is to be handled. However, while that may be true, the legislature made no effort to reduce the higher rate on public utilities. Thus, if the counties begin to impose the real property tax on public utilities, ratepayers will end up paying higher bills and paying the real property tax imposed on utilities twice – once under the state tax and again to the counties.

Given that the counties have complete control over the property tax and the public service company tax was originally a replacement for the property tax, lawmakers should have at the very least reduced the public service company tax rate to 4%. Instead taxpayers will be hit twice for the same tax.


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