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Opportunities Abound to Finance Transit System

posted in: Weekly Commentary 0
By Lowell L. Kalapa

The other day when the House Finance Committee members heard measures to give the counties the option to tack on up to one additional percentage point to the general excise tax rate currently at 4%, one astute committee member observed that the debate was not whether or not a transit system should be built for Oahu as much as it was a debate over how to pay for it.
As the lawmaker went on to note, raising the general excise tax rate was not the only alternative to raising the necessary funds, but it appeared to be the most palatable as one could argue that it is just another “penny” in the tax rate. Indeed, the ability to nickel and dime consumers and taxpayers with just another penny makes the general excise tax the “easy target” for raising the more than $300 million a year needed to build the transit system for Honolulu.
But when the “pennies” are added up and the fact becomes painfully clear that we are talking about nearly $1,000 more a year for a family of four, then the penny becomes real money. And as one witness pointed out, the general excise tax is a “regressive” tax, falling more heavily on low-income families than higher income families because the tax represents a greater percentage of the low-income family’s budget.
What are some of the other alternatives? Well, the counties already have the power to levy the real property tax, they can decide who is exempt and how much each category of property will pay by setting differential rates. Thus, each of the counties could raise additional funds without having the legislature authorize the counties to do so. In the case of the City & County of Honolulu, the real property tax rate would have to be raised by approximately 60% to generate the needed $300 million for the proposed transit system. That means the real property tax rate on residential categories would have to go from $3.75 per thousand dollars of net assessed value to $6 per thousand dollars of assessed value.
For the owner of a house with a net assessed value of $500,000, the annual tax bill would go from $1,875 to $3,000. However, one of the advantages of using the real property tax is that it is deductible against the state and federal income taxes. So about one third of that tax bill could be used to reduce the taxpayer’s federal and state income tax bills. And if county officials wanted to assess those who would have direct benefit of the system, property tax rates for certain geographic areas could be adjusted to have those residents pay a bit more for the benefit of the system.
Conversely, unlike the general excise tax which is regressive, using the state net income tax would at least impose a heavier burden on those who have the ability to pay more while being able to avoid increasing the tax burden on the poor in our community. A surcharge could be imposed after a certain income threshold so that only those who could afford to carry the extra $300 million annual tab are asked to pay for it. How much that surcharge would be would depend on at what level of income it is imposed.
However, like the real property tax, the net income tax paid to the state is deductible against the federal income tax so a part of the burden would be borne by the federal government in that state income taxpayers would not be paying as much to the federal government.
And between the real property tax and the state net income tax, which of the two would be more reflective of the benefits to be realized? Well, of the two, the real property tax is probably best suited as it can be targeted to the population that will directly benefit and it would be deductible against federal and state income taxes. Plus, the real property tax would be paid by visitors who stay in hotels, which pay the real property tax, and no doubt be reflected in all goods and services provided in the state to both in-state and out-of-state customers.
Speaking of visitors, one might suggest raising the transient accommodations tax as it can be imposed only on Oahu hotels. The problem is that the base is relatively narrow such that the rate would have to go up substantially in order to generate the needed $300 million. The current 7.25% generates about $125 million from Oahu hotel rentals. Gave that productivity, the rate would have to be raised by another 17 percentage points for a total rate of 24% which would undoubtedly have an impact on occupancy.
While there is no easy answer on how the transit proposal for Honolulu will be financed, lawmakers should not be so quick to look for an easy way out, but should take the time to examine all alternatives.

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