KHON Channel 2
The state’s share of the rail tax on Oahu is facing its first legal challenge.
Always Investigating started digging into the tax earlier this year and broke news of the lawsuit earlier this month.
We’ve tracked the administrative fee portion, and learned nearly $170 million of what’s collected has gone into the state’s general fund.
That’s money not going to the Honolulu Authority for Rapid Transportation to build rail, as the tax was intended.
The Tax Foundation of Hawaii, a tax watchdog group, said that the state’s share was unconstitutional, and now it has officially filed a lawsuit over it.
Since the tax started, the state has been taking 10 percent off the top as an administrative fee that was billed as a way to cover the cost to the state for collecting the cash.
But the amount they’ve collected is more every year than the annual budget of the whole tax department itself, and all the extra just goes to the state’s general fund.
Tax Foundation of Hawaii president Tom Yamachika said it makes the fee look like a tax.
“Governments don’t tax each other,” he previously told KHON2. “We’ve told them that the 10 percent off the top is unconstitutional and if they don’t want to do anything about it, there may be consequences.”
“When we say something is going to cost 10 percent for administration, then we’d better be able to justify if it’s 10 percent,” said Sen. Sam Slom, R, Hawaii Kai, Aina Haina, Kahala. “If not, that’s money that should either be remaining in the treasury or in this case, unfortunately from my standpoint, would go to HART and the rail.”
Yamachika stresses that the lawsuit isn’t about whether the rail project is good or bad.
If the state’s share continues, its take could top $570 million if the rail tax is extended to 2027.
“They said that there would be a $3.5 million upfront cost and then $2.5 million every year after,” Yamachika said. “We don’t dispute that, because the state is collecting the tax on behalf of the city, that they’re entitled to something, but this is too much.”
The state attorney general’s office issued an opinion recently standing by the legality of the tax.
Last month, a deputy attorney general wrote, in a response Always Investigating obtained, that it’s all legal. What’s more, the response said, the state has to take the full 10 percent instead of the actual costs because the law says they “shall” not just that they “may.”
The lawsuit doesn’t specify where the extra money should go, if it should be given to HART to build rail or refunded to taxpayers.
Hawaii Revised Statutes
[§248-2.6] County surcharge on state tax; disposition of proceeds. [Section repealed December 31, 2022. L 2005, c 247, §9.]
(a) If adopted by county ordinance, all county surcharges on state tax collected by the director of taxation shall be paid into the state treasury quarterly, within ten working days after collection, and shall be placed by the director of finance in special accounts. Out of the revenues generated by county surcharges on state tax paid into each respective state treasury special account, the director of finance shall deduct ten per cent of the gross proceeds of a respective county’s surcharge on state tax to reimburse the State for the costs of assessment, collection, and disposition of the county surcharge on state tax incurred by the State. Amounts retained shall be general fund realizations of the State.
(b) The amounts deducted for costs of assessment, collection, and disposition of county surcharges on state tax shall be withheld from payment to the counties by the State out of the county surcharges on state tax collected for the current calendar year.
(c) For the purpose of this section, the costs of assessment, collection, and disposition of the county surcharges on state tax shall include any and all costs, direct or indirect, that are deemed necessary and proper to effectively administer this section and sections 237-8.6 and 238-2.6.
(d) After the deduction and withholding of the costs under subsections (a) and (b), the director of finance shall pay the remaining balance on [a] quarterly basis to the director of finance of each county that has adopted a county surcharge on state tax under section 46-16.8. The quarterly payments shall be made after the county surcharges on state tax have been paid into the state treasury special accounts or after the disposition of any tax appeal, as the case may be. All county surcharges on state tax collected shall be distributed by the director of finance to the county in which the county surcharge on state tax is generated and shall be a general fund realization of the county, to be used for the purposes specified in section 46-16.8 by each of the counties. [L 2005, c 247, §5]