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Another Standoff Leaves Highway Fund In Limbo

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By Lowell L. Kalapa

(Released on 2/17/08)

What are taxpayers to think when elected officials, both at the administrative level and at the legislative level, stick their heads in the sand when they know there is a problem.

Such is the case with the state highway fund. Warned last session that the state highway fund is headed for financial disaster, both the administration and the legislature blithely turned the problem over to the proverbial task force figuring a group of astute minds could come up with a solution to the ailing highway fund.

Well, after both the legislature and the administration convened task forces of their own, they looked at the problem and pronounced the fact that the state highway fund is going to run out of money by the year 2013, but neither decided to make a recommendation on how to bail out the fund. The joint legislative task force surveyed the problem and noted that the resources available to the highway fund could not keep up with the growing cost of repairing and maintaining the state’s highways. The legislative task force suggested that the highway department should become more efficient, but stopped short of suggesting a revenue plan that would shore up the finances of the state highway fund. Instead, the legislative tax force opted to wait for the administration to submit a recommendation on how to bail out the fund.

Meanwhile, the administration convened its own task force in the interim, holding a two-session party. While the members of the task force agreed that there is a problem with the state highway fund and looked at a variety of alternatives, it also stopped short of making a firm recommendation. As a result, no comprehensive package of revenue enhancements was submitted to the 2008 session of the legislature.

Why didn’t either task force make a recommendation to shore up the highway fund? The answer is so obvious. It’s an election year and no elected official would be caught dead suggesting that taxes be raised. It’s another standoff at the OK Corral.

What elected officials don’t seem to realize is that as long as the state highway fund is dependent on resources that are based on the number of units consumed, like the gasoline tax where the tax is cents per gallon or the vehicle weight tax which is based on the number of pounds the vehicle weighs, the resources to the highway fund will never keep up with the inflation affected cost of repairing and maintaining the state’s highways. As a result, observers have long agreed that these taxes that finance the state highway fund will have to be periodically adjusted or a new source of funding must be found that will have the elasticity to keep up with the rising cost of road maintenance.

When faced with a similar problem back in the early 1980’s, it was suggested that lawmakers consider diverting the receipts of the general excise tax on the sale of motor fuel from the general fund to the highway fund based on the rationale that highway users pay that portion of the general excise tax. It was pointed out that few, if any, of the other states with sales taxes impose their sales tax on top of the state fuel tax. However, because the broad base of the general excise tax reaches into every transaction, fuel sales in Hawaii are saddled with both the fuel tax as well as the general excise tax. So in 1981 lawmakers adopted that strategy and renewed it when it sunset in 1985.

When the state general fund started to head south in the early 1990’s, lawmakers took back the collections of the general excise tax on fuel and instead came up with the idea to tax tourists by imposing a surcharge on rental cars and tour vehicles. This was a way for lawmakers to forgo doubling the fuel tax.

Initially set at $2 per day, the rental car surcharge was increased in 1999 to $3 per day for a seven-year period. That increase was supposed to have sunset last year, but instead it was extended one more year giving lawmakers the breathing room to come up with a more permanent solution to the state highway fund. The administration has now proposed making that $3 per day surcharge permanent.

Downstairs lawmakers have decided to also consider the transfer of the general excise tax realized from the sales of motor fuel to the state highway fund effective later this year. Problem with that is that the exemption of gasohol runs another whole year until June 30, 2009. In the meantime, the hole in the highway fund gets bigger and bigger.

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.

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