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The Ten Percent Solution

By Tom Yamachika, President
(For Release 1/18/15)

Lately, the City & County rail surcharge has had lots of press coverage because the rail project is now likely to cost lots more than anticipated. To fund the overages, the City & County is prepared to ask the Legislature for an extension of the surcharge.

Before we do that, however, we need to understand one aspect of the system that hasn’t been talked about much: the state has been draining money out of the surcharge. Lots of money.

When the bill that became our surcharge law was being debated at the state Legislature, the thought was that our state Department of Taxation (DOTAX) would collect the tax and pay it over to the counties adopting the surcharge. DOTAX, of course, wasn’t thrilled at the idea of taking on a whole new tax using no more than its existing budget. So legislators came up with the idea of having some of the county surcharge paid to DOTAX for collecting it. At the time, no one knew exactly how much it would cost to administer this tax, so it was ultimately agreed that ten percent of the total surcharge would be the payment. And DOTAX doesn’t have a lot of special funds that it controls, so the bill provided that the fee would go to the state general fund.

Fast-forward to the present. In the fiscal year ending June 30, 2014, about $242 million was collected for the county surcharge, meaning that the state kept $24 million. Did it cost that much to collect the surcharge? The Governor’s Budget in Brief just released says that it takes $28 million a year for DOTAX to do everything it does, including collecting $6.34 billion in total taxes other than the county surcharge.

There is a principle in constitutional law called “intergovernmental tax immunity.” That principle began when the U.S. Supreme Court told the states that they had no business taxing federal instrumentalities, and then some years later said that the principle also works in reverse, so that the federal government doesn’t have the right to tax state and local governments when they exercise their sovereign functions. Although the Hawaii Supreme Court hasn’t spoken on the extent to which that principle applies, there is some sense that the state and county governments aren’t supposed to tax each other as well.

But is this 10% solution a tax? The Hawaii Supreme Court has given us some guidelines to distinguish between user fees and taxes. In State v. Medeiros, a 1999 case, it said that the courts should analyze whether the charge in question: “(1) applies to the direct beneficiary of a particular service, (2) is allocated directly to defraying the costs of providing the service, and (3) is reasonably proportionate to the benefit received.” Let’s assume that the 10% charge can pass item (1). It will probably fail item (2) miserably because the money collected goes straight to the general fund. Because this charge brings in what amounts to 85% of DOTAX’s budget while the county surcharge itself makes up less than 4% of the revenues DOTAX collects, there are serious concerns about whether it can pass item (3). Folks, this charge walks like a tax and quacks like a tax, and, as such, it’s constitutionally suspect because it’s being charged against another government exercising its sovereign authority.

To put it another way, it probably makes sense to pay DOTAX for actual costs to collect the surcharge, but 10% is starting to look like grand theft. If Honolulu citizens are going to have to bear the pain of the county surcharge to pay for rail, they shouldn’t have their agony prolonged because the state is draining the pot far more than it deserves.

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  1. Tom Yamachika

    This article was cited in a Star-Advertiser editorial on Jan. 25. Here is a Hawaii Free Press article that quoted the editorial and former Gov. Ben Cayetano’s reaction to it:

    Star-Adv: State ‘skim’ of rail tax must stop

    SA: State lawmakers pledge to cast a critical eye as Honolulu’s over-budget rail-transit project seeks to extend a tax surcharge financing the project. But legislators must also aim that laser focus at themselves, for allowing an exorbitant 10 percent state “skim” of intended rail funding to persist beyond all justification.

    Lawmakers must reduce the grossly inflated administrative fee the state charges the Honolulu Authority for Rapid Transportation in exchange for collecting the half-percent Oahu surcharge on the 4 percent state general excise tax.

    Oahu consumers have paid the surcharge since 2007 to fund construction of the 20-mile elevated rail system, and far too much of the tax revenue is being diverted to the state general fund….

    The “skim” issue is all the more urgent this legislative session not only because the rail project needs more money, but also because the Legislature is poised to consider giving neighbor island counties the option of imposing a GET surcharge in their own jurisdictions.

    No such consideration should be given until the state lowers the administrative fee to the actual cost of collecting and administering the surcharge, with no profit taking.

    This scheme of boosting state general funds via what amounts to a hidden tax must end now on Oahu, rather than being exported to the neighbor islands….

    The president of the Tax Foundation of Hawaii observed on the fiscal watchdog’s website that the skim may be unconstitutional, potentially violating the “intergovernmental tax immunity” that prevents sovereign governments from taxing one another.

    Tom Yamachika reached that conclusion after noting that in the fiscal year ending June 30, 2014, Oahu’s GET surcharge generated $242 million, meaning that the state kept $24 million as its administrative fee.

    Meanwhile, the Department of Taxation’s total annual budget is $28 million — that’s what it costs every year “for DOTAX to do everything it does, including collecting $6.34 billion in total taxes other than the county surcharge,” Yamachika writes at http://www.tfhawaii.org.

    As he concludes, because the skim equals 85 percent of DOTAX’s annual budget while the Oahu surcharge accounts for less than 4 percent of the revenue DOTAX collects, there is no way it can be justified as a legitimate administrative fee.

    Ben Cayetano: “Of course, the 10% fee for “administrative services” is too high. However, when the legislature approved the rail surcharge, all parties to the bargain must have surely realized that the 10% fee was a ploy to raise revenue for state coffers under the guise an “administrative fee.” Hannemann, Caldwell understood and agreed to it. The City got the rail surcharge, the state got additional revenue. That was the bargain. Pure hypocrisy to argue about “fairness” now.”

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