Mayor eyes property tax for rail’s funding source

Oahu property taxes would need to jump 8 to 14 percent for the city to pay the remaining tab on an East Kapolei-to-Ala Moana rail line if state lawmakers don’t agree to a 10-year extension on the general excise tax surcharge, city officials told the Honolulu Star-Advertiser.

The House version of Senate Bill 1183, which moved out of the Finance Committee last week and is up for a final House vote today, calls for the half-cent surcharge to be extended only two more years, until Dec. 31, 2029, a move that would provide an additional $1.2 billion for the project.

That’s far less than the 20-year extension that Mayor Kirk Caldwell’s administration had originally sought, and less than the 10-year extension it would like to settle at. On Monday, Caldwell forwarded a letter to House Speaker Joe Souki asking that House members amend the bill to address “serious constitutional flaws” and to consider extending the surcharge to 2037.

House Finance Chairwoman Sylvia Luke said the two-year extension should be enough for the city to be able to collect a total of $8.165 billion, which is what the city has said it will cost to build the project.

But Caldwell said that figure does not factor in between $1.4 billion and $2 billion in debt service on bonds that needs to be incurred for the project to maintain cash flow in the next few years — when the greatest costs are being incurred.

“It’s nowhere near what we’re going to need, obviously, and so we’d have to make up the difference at the city level,” Caldwell said. “And of course, where do we get that money from? It comes out of real property taxes.”

Caldwell has insisted through the years, including during last year’s mayoral campaign, that he would not consider raising property tax rates to pay for rail construction. He has also pointed out that a city ordinance specifically bars the city from using general fund revenues, including property taxes, to pay for rail construction.

However, he said, short of a 10-year GET surcharge extension, and assuming there is enough interest from the City Council to keep a 20-mile, 21-station line alive, he is prepared to introduce bills that would allow property taxes to pay for rail construction and amend the budget to reflect higher tax rates for all.

The current $2.45 billion city operating budget already proposes rate hikes for the hotel-resort and Residential A tax classes but not for the standard residential category, which is the largest — and most politically volatile — segment.

“And this is just for now,” Caldwell said, noting that the city would need to start paying $400 million annually to subsidize the combined operations and maintenance of rail, bus and Handi-Van beginning when operation starts in 2025. Property taxes already subsidize bus and Handi-Van operations by about 70 percent annually.

Caldwell said bond underwriters have told city officials that raising property taxes for construction could jeopardize the city’s bond rating.

“No other system that they know of is using general fund money to pay for construction of a rail project,” he said. Typically, a dedicated source of funding is a sales or excise tax, he said.

Despite his strong words against the use of property taxes to pay for rail construction, Caldwell was expected to submit to the Council today a bill that would remove the ban on using general fund revenues for rail construction.

Robert Yu, chief financial officer for the Honolulu Authority for Rapid Transportation, said $8.165 billion is all the city would need if it had all of that money to use today. He likened the situation to a family purchasing a car on credit and needing to pay interest on the loans.

Because the construction is in full swing and is expected to be operational in late 2025, “We need to borrow about $3 billion … over this period between the end of 2018 to about ’22 or ’23,” Yu said.

Luke, the House Finance chairwoman, predicted that the Council would reject any proposal for a large property tax increase to fund rail.

“We’re not saying property taxes should be the only thing,” Luke said. “What we’re asking them to do is look at all viable options, including public-private partnerships and including other means. … For them to just say, ‘If we don’t get this, we’re going to do a property tax increase’ … I don’t know if the City Council is even going to allow that.”

Assuming the bill is approved by the House today, it typically would then go to a conference committee, where lawmakers would hash out differences with the Senate version. But Luke said it is possible lawmakers will skip the entire conference committee process and that the Senate would simply agree to the House proposal.

But Luke said she’s not even sure the full House will agree to the Finance Committee plan. When the issue was discussed in a closed-door caucus Monday, people on both sides of the rail issue had concerns, she said.

Both City Council Chairman Ron Menor and Budget Chairman Joey Manahan said they’re hopeful extending the surcharge to 2037 can still be considered, if not at today’s meeting then in conference committee.

Menor said it makes sense to fund rail through the excise tax because it applies to visitors to Hawaii who stand to benefit from the rail project.

Oahu residents are already going to have to pay for operational costs of the project through property taxes, and lawmakers, if they refused to grant a 10-year extension, would be forcing the Council to consider the property rate increase, he said.

One option that would not involve raising property taxes would be to consider shortening the line, possibly to Aloha Tower, Menor said. But that might have negative impacts on ridership and the project’s overall viability, he said.

Manahan said one proposal being discussed at City Hall involves raising the standard residential class property rate by 35 cents a year, to $3.85 cents per $1,000 of assessed value.

“We’re kind of bracing ourselves, preparing for the worst,” he said. “We do have to come up with a dedicated funding source.”

Councilman Ernie Martin said it’s wrong to use the threat of property tax increases to leverage the Legislature into passing a surcharge extension. “The reality is that we will have to raise property taxes at some point to continue paying for core government services that are heavily subsidized,” he said.

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Star-Advertiser Capitol Bureau Chief Kevin Dayton also contributed to this story.