Another provision forwarded by the 1978 Constitutional Convention that has had a long-term impact on the way government does business in Hawaii was the transfer of the power to impose the real property tax from the state to the counties.
The real property tax had been one of a number of targets for the counties as means to find alternative sources of funding for county operations. Proposals had ranged from giving the counties the power to levy an income tax to an additional rate on the general excise tax. However, the more obvious tax was the real property tax as the counties had been the beneficiaries of this tax for years.
While the counties received the benefits, that is the collection of the tax, and did have the ability to set the real property tax rate, the policy as reflected in the tax was set by the state legislature. In fact, the counties had very little control over their financial destiny through much of the early years of statehood. As late as the days just before statehood, the territorial treasurer determined how much each county would get out of the real property tax and for many years there was actually a dollar cap on how much real property taxes could be raised.
Thus county officials came to the 1978 Constitutional Convention with a vengence, they wanted autonomy insofar as their fiscal destiny. They promised convention delegates that if they were given the power over the real property tax they would be able to raise the money they needed to operate their governments and that they would never again have to bother the state legislature.
Others like the Tax Foundation saw numerous flaws in the idea of giving the counties complete control over the real property tax. A major hurdle would be to keep track of each county and how they decided to set policy for each county wanting to do its own thing. Indeed the convention delegates thought that if the counties went out and did their own thing immediately, it would turn the property tax situation into turmoil. Convention delegates also felt that once the counties had the power over the tax they might regret it.
As a result, the convention delegates added a provision to the transfer of the property tax to the counties which basically mandated that the counties adhere to a uniform method of assessment in all counties and required the counties to honor all existing exemptions and dedication provisions for an eleven-year period. Why eleven? Well, with a mandatory call for a convention required every ten years, convention delegates thought that another convention might want to take a look at the situation before that eleven-year period expired.
As history now knows, the eleven years came and went and the counties continue to administer and control the real property tax. However, that is not to say that they went away and never bothered the state again. On the contrary, less than ten years later, they were back at the legislature asking for another source of financing and this time they came away with a portion of the transient accommodations tax (TAT).
While the counties continue to manage the real property tax, one more problem remains in consummating the complete transfer of the tax and that is the exemption of public utility property from the tax provided under state law. The tax that public utilities pay, called the public service company (PSC) tax, is imposed in place of the general excise tax and the property tax. It is that latter tax that continues to bother county officials.
The state tax paid by utilities imposes a rate higher than the general excise tax rate of 4% theoretically to account for the amount that the utilities would otherwise have paid in property taxes. The problem is that the exemption from real property taxes has continued, thus preventing the counties from collecting property taxes from these businesses.
Now one county has decided to impose the property tax despite efforts to seek a sharing of the revenues the state currently collects under the PSC tax. Since the state refused to share those revenues, the counties seem to be justified in getting what is truly theirs.
The long and short of it is that if the state does not share the receipts of the state tax nor does it lower the tax rate to 4% and the counties begin to impose the real property tax, the only losers in this equation will be the customers of the utilities. It seems that if the state is unwilling to lower the rate, then it has a responsibility to share those revenues with the counties as a means of preventing the imposition of the real property tax on utilities and ultimately their customers in what amounts to a double tax.