Category Archives: Uncategorized

SB 1463; HB 1459 (Identical)

SUBJECT:  FUEL, Carbon Emissions Tax; License Tax

BILL NUMBER:  SB 1463; HB 1459 (Identical)

INTRODUCED BY:  SB by K. RHOADS, RUDERMAN, Baker, S. Chang, Harimoto, Keith-Agaran, Shimabukuro; HB by TARNAS, BROWER, ELI, ICHIYAMA, D. KOBAYASHI, C. LEE, LOWEN, MIZUNO, NAKASHIMA, SAY, TODD, Creagan, Morikawa

EXECUTIVE SUMMARY:  The bill intends to replace the current barrel tax and fuel tax with a revenue neutral carbon emission tax on the sale of all fuels with carbon content.  This bill forces us to rethink how we now tax fossil fuel.  The current patchwork of different state and local taxes all applying at once leads to unclear and inconsistent messages sent to the taxpaying public, which is not good for implementing social policy regardless of what the policy is.

SYNOPSIS:  Renames chapter 243, HRS, as the Carbon Emissions and Fuel Tax Law.

Amends section 243-3.5, HRS, which now imposes the barrel tax, to a carbon emissions tax calibrated to $6.25 per ton of CO2.  The tax is imposed on a distributor of the fuel.

Provides that the tax is distributed as follows:

  • $1,290,000 to the environmental response revolving fund (HRS section 128D-2);
  • $3,872,000 to the energy security special fund (HRS section 201-12.8);
  • $2,582,000 to the energy systems development special fund (HRS section 304A-2169.1);
  • $3,872,000 to the agricultural development and food security special fund (HRS section 141-10).

Provides grandfather protection to coal used to fulfill a signed power purchase agreement between an independent power producer and an electric utility that is in effect between June 30, 2015, and September 1, 2022.

Exempts fuel sold for use in and actually delivered to, or sold in, the county of Kalawao.

Amends HRS section 243-4 to delete the state fuel tax and to exempt from county fuel tax gasoline or other aviation fuel sold for use in or used for airplanes, or naphtha sold for use in a power-generating facility.

Makes technical and conforming changes.

Repeals HRS section 235-110.6 (which now provides for a fuel tax credit for commercial fishers).

EFFECTIVE DATE:  Applies to taxable years beginning after December 31, 2018.

STAFF COMMENTS:  An economist from UHERO, the University of Hawaii Economic Research Organization, recently posted an analysis arguing that strong, decisive action such as a carbon tax is going to be needed if we are going to achieve the greenhouse gas goals.  “But without any specifics as to how we are to achieve [greenhouse gas] reductions – through a carbon tax or otherwise – it is largely symbolic,” she argues.

So what is a carbon tax?  It is a tax imposed on the carbon content of different fuels.  Typically, it is due and payable when the fuel is either extracted and placed into commerce, or when it is imported.  At present, neither the U.S. federal government nor any U.S. state has enacted a carbon tax.  The city of Boulder, Colorado, enacted one by referendum in 2006; it applies at the rate of $7 per metric ton of CO2 and is imposed on electricity generation only.  Several European Union countries, Japan, and South Africa have carbon taxes.

Presently, we have a liquid fuel tax (chapter 243, HRS).  Like a carbon tax, the fuel tax is imposed upon import and entry into commerce.  So, PFM Group, the consultant employed by the Hawaii Tax Review Commission, in its final report thought that the systems and processes we now have in place to collect fuel tax in Hawaii can be adapted to a carbon tax, and for that reason concluded that a carbon tax would entail “[l]ittle administrative burden.”  There are, however, several important differences between the two:

Both the county and state governments are given the power to impose fuel tax.  This bill repeals the state fuel tax but does not affect the counties’ power to impose fuel tax.

The fuel tax is now earmarked for Highway Fund use, and the money in that fund is spent by the Department of Transportation.  As a result, vehicles that don’t use the highways, such as tractors and other farm machinery, are exempt from fuel tax.  A carbon tax would need to apply to both on-road and off-road use, as long as the CO2 generated from burning it gets into the atmosphere.

The potential big losers will be the electric companies, because electric generation accounted for 6.8 million metric tons of CO2 in 2013 out of a total 18.3 million metric tons.  However, the electric companies won’t simply absorb the tax, but can be expected to pass on the enhanced costs to anyone who gets an electric bill.

Perhaps it’s good for lawmakers to worry about the end of the world as we know it, which perhaps will be staved off by the social change the tax encourages.  But their constituents are worried not about the end of the world, but the end of next week.  Will their paychecks be enough to pay the rent, keep the lights on, or feed the family?  If the cost of simply driving to work from the suburbs is horrible now, just wait until the tax kicks in.

And if you think the hammer of a carbon tax will fall most heavily on huge, faceless corporations like the electric company, the airlines, or the shippers, think again.  Businesses can and will pass on any enhanced costs to their consumers if they hope to continue providing their products or services.  That means our already astronomical cost of living could head further up into the stratosphere.  In theory, that would not happen under this bill, which is intended to be revenue neutral; but tax rates can be and are adjusted over time.

Digested 2/8/2019

HB 387, HD-1

SUBJECT:  TOBACCO, Prohibits Shipment of Tobacco Products, Adds Electronic Smoking Devices, Hikes Rates and Fees

BILL NUMBER:  HB 387, HD-1

INTRODUCED BY:  House Committee on Health

EXECUTIVE SUMMARY:  Prohibits the shipment of tobacco products, and the transport of tobacco products ordered or purchased through a remote sale, to anyone other than a licensee. Makes all provisions of the cigarette tax and tobacco tax law that relate to tobacco products applicable to e-liquid. Increases the license fee for wholesalers or dealers and the retail tobacco permit fee. Amends the taxes on cigarettes and tobacco products. Increases the excise tax for each cigarette or little cigar sold, used, or possessed by a wholesaler or dealer. Increases the excise tax on the wholesale price of each article or item of tobacco products, other than large cigars, sold by the wholesaler or dealer.  Our question is whether tax increases are an effective way to advance the social policy goals contained in this measure.

SYNOPSIS:  Adds a new section to chapter 245, HRS, to establish the offense of unlawful shipment of tobacco products.  If a person is in the business of selling tobacco products and ships to a person in Hawaii that is not a tobacco tax licensee, a person transporting tobacco products under federal control, or a customs bonded warehouse, the person commits the offense.  Exceptions are provided if the tobacco products are exempt from Hawaii tobacco tax, a specified notice is placed on the shipment, or Hawaii tobacco tax on the products is already fully paid.  The offense is a misdemeanor and the offender also may be subject to a civil fine of up to $5000 per offense.

Amends section 245-2, HRS, to raise the annual fee for a tobacco license from $2.50 to $250.00.

Amends section 245-2.5, HRS, to raise the annual fee for a retail tobacco permit from $20 to $50.

Amends section 245-3, HRS, to raise the tobacco tax for cigarettes and little cigars from 16 cents to an unspecified amount, and to raise the tax rate for other tobacco products, except for large cigars, from 70% of the wholesale price to an unspecified percentage.

EFFECTIVE DATE:  July 1, 2050.

STAFF COMMENTS:  The question that should be asked is the purpose of the tobacco tax. If the goal is to make people stop smoking by making it cost-prohibitive to smoke, then (a) it’s working, as hikes in the cigarette tax have begun to exert downward pressure on collections not only locally but also nationally, but (b) it shouldn’t be expected to raise revenue, because of (a). If the goal is really to stop the behavior, why are we not banning it?

As the Foundation’s previous President, Lowell Kalapa, wrote in the Tax Foundation of Hawaii’s weekly commentary on October 28, 2012:

Lawmakers seem to have a simplistic reaction to solving problems the solution to which plagues their constituents – tax it.

Probably the best example is what people like to call sin taxes, those excise taxes that are levied on tobacco and alcohol products.  After all, smoking causes cancer and alcohol causes all sorts of problems including driving under the influence.  Lawmakers and community advocates shake their heads and push for higher tax rates, arguing that making these products more expensive will deter folks from using these products.

The problem is that lawmakers also like the revenues that are generated from the sales of these products and, in some cases, they have tried to link the use and sale of these products with noble causes such as the funding of the Cancer Research Center that is currently being built.  Again, the argument is that smokers should pay for programs and projects which seek to cure the related ill which in this case is cancer caused by smoking.

The irony is that arguments to increase the tax on tobacco and, more specifically, cigarettes, is a goal of getting smokers to quit while depending on the revenues from tobacco and cigarette taxes to fund an ongoing program, in this case the Cancer Research Center.  So, which is it folks, stop smokers from smoking and if successful, there won’t be any revenues to fund the Cancer Research Center?

The fact of the matter is that it appears that both locally and nationally, higher taxes on cigarettes is having an effect on smokers as, for the first time, tax collections on the sale of cigarettes have fallen below the previous year’s tax collections.  Certainly some of the decline is due to smokers actually quitting, but to some degree one has to suspect that some purchases were made via mail order from exempt Indian reservation outlets while others may be what is called gray market purchases, that is from sources outside the country.

What should come as a surprise is that most of the folks who have quit are of some means as they are more likely to recognize the health hazard caused by use of this product. That means most of those who are still smoking are among the lower-income members of our community.  Thus, the tax is regressive, generating less and less collections from middle and higher-income individuals.

As predicted, programs that have been fed by earmarks from the tobacco tax, like the Cancer Research Center, have become a victim of the success of tobacco cessation programs and publicity.  Revenues produced by the tobacco tax have been in steady decline over the past few years despite tax rate increases, and hoisting the smoking age to 21 in the 2015 session certainly didn’t reverse the trend.

Source:  Department of Taxation Annual Report (2017-2018), page 22.

Do we really need an elaborate study to tell ourselves that fiscal reliance on funds from a sin tax is inadvisable or outright dangerous?  If the goal is to affect social behavior, use of the tax law is not the most effective way to do so.

Digested 2/10/2019

HB 394

SUBJECT:  MOTOR VEHICLE, Applies Beautification Fee to U-Drive Vehicles

BILL NUMBER:  HB 394

INTRODUCED BY:  HASHIMOTO, DECOITE, ELI, HOLT, ICHIYAMA, KITAGAWA, D. KOBAYASHI, B. KOBAYASHI, MATAYOSHI, NAKAMURA, QUINLAN, TODD, WILDBERGER, YAMASHITA, McKelvey, San Buenaventura

EXECUTIVE SUMMARY:  Prohibits the shipment of tobacco products, and the transport of tobacco products ordered or purchased through a remote sale, to anyone other than a licensee. Makes all provisions of the cigarette tax and tobacco tax law that relate to tobacco products applicable to e-liquid. Increases the license fee for wholesalers or dealers and the retail tobacco permit fee. Amends the taxes on cigarettes and tobacco products. Increases the excise tax for each cigarette or little cigar sold, used, or possessed by a wholesaler or dealer. Increases the excise tax on the wholesale price of each article or item of tobacco products, other than large cigars, sold by the wholesaler or dealer.  Our question is whether tax increases are an effective way to advance the social policy goals contained in this measure.

SYNOPSIS:  Amends section 286-51, HRS, to raise the beautification fee for U-drive vehicle registrations from $1 to $2, which is the rate generally applicable to vehicles.  Deletes the proviso that a county’s power to increase the beautification fee by ordinance will not apply to U-drive vehicles, so that the county ordinance may apply to all vehicles.

EFFECTIVE DATE:  July 1, 2019.

STAFF COMMENTS:  The special reduced beautification fee for U-drive vehicles was enacted by Act 274, SLH 1999, which raised the beautification fee from $1 to $2 and gave the counties the power to raise it further, but froze the beautification fee for U-drive vehicles at $1.  This bill reverses the preferential treatment of U-drive vehicles.

Digested 2/10/2019