State ‘skim’ of rail tax must stop

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 surcharge was supposed to expire in 2022, but Mayor Kirk Caldwell and transit officials are asking lawmakers to extend it, as the project has fallen $550 million to $910 million behind, depending on which funding sources are counted.

HART says it needs lawmakers to act this session so that continuous funding is assured and it can certify future contracts as they come in, rather than facing expensive delays; state law requires sufficient funding for a contract to be legally binding.

The total estimated cost of the system, which includes 21 rail stations from East Kapolei to Ala Moana Center, has risen from $5.2 billion to about $6 billion.

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.

Past bills with this aim died before passage. Such a measure must be approved this year, despite the state’s tight budget outlook.

No doubt state-funded programs that have benefited from this taking would suffer in the short term, but lawmakers must acknowledge that diverting so much money from its rightful purpose warps the intent of the Oahu surcharge.

Maintaining the skim would have a similar negative effect if applied to surcharges approved in other Hawaii counties in the future.

The harm to Oahu’s rail project is obvious, and mounting. Over the current 15-year life of the surcharge, skimmed at the current percentage — 10 percent a year from 2007-2022 — the state is projected to take in about $400 million.

If HART received that money instead, even its worst-case projected budget deficit would seem far less daunting.

It’s too late to undo the past, but the money grab moving forward must be averted.

It’s fine to have the state Department of Taxation collect the surcharge — it is added to the state GET tax, after all — and then turn it over to the county. But any fee collected should reflect only the actual cost of administering the surcharge, not a huge overage that goes into the general fund.

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 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.

This issue has festered for years. Lawmakers have allowed it.

So by all means, legislators should ask rail transit and city officials the tough questions, probing HART’s budget projections, its efforts to contain costs, and its rationale for extending the Oahu surcharge now rather than later.

But they face difficult ones, too: Why has the state raided rail-transit’s coffers for so long — exploiting Oahu consumers in the process — and what are they going to do about it?