Rail stress caused legislative leaps

Rail and the political turmoil that surrounds it helped steer the state Legislature into dramatic new positions last week on some longstanding, contentious issues, with results that startled even some of the politicians involved.

Instead of extending the half-percent excise tax surcharge for rail as Honolulu Mayor Kirk Caldwell urgently requested, lawmakers tentatively agreed Friday to raise the state’s hotel room tax for 10 years to bail out the city’s stunningly expensive rail project.

And after rejecting the excise tax surcharge extension, lawmakers gave preliminary approval to another bill to increase income taxes on the state’s wealthiest taxpayers to finance a new state earned income tax credit. That move is designed to help some of Hawaii’s poorest residents at the expense of the richest.

Like them or not, those were breakthrough decisions on some longstanding controversies, and they emerged from a session that featured more than a little backroom politics.

The rail tax and the earned income tax credit were linked in lawmakers’ minds because the credit was seen as a way to ease the burden on the poor in the event that the excise tax surcharge for rail was extended.

Lawmakers felt they had to do something to cushion the impact of the tax surcharge on working families, and that concern focused more attention than usual on the years-long debate over the earned income tax credit. Although the excise surcharge failed in the end, the furious debate about it helped to finally advance the earned income tax credit, lawmakers said.

Tom Yamachika, president of the Tax Foundation of Hawaii, has doubts about both decisions. The increase in the hotel room tax was a last-minute proposal that was never vetted in a public hearing, and “it’s disconcerting that the stakeholders were really taken by surprise,” he said.

“Usually, you would expect a major tax increase to be fully debated among the stakeholders involved, but nowhere in the process did the tourist industry, especially, have any inkling” that a hotel tax increase from 9.25 percent to 12 percent was in the works, Yamachika said. If approved, industry officials say it would be the largest single increase in the hotel tax.

The plan to increase income taxes on wealthy residents to finance an earned income tax credit for lower income people amounts to transferring money from the rich to the poor, which is something the tax system was not designed to do, he said.

“We think that the tax system is supposed to be for raising revenue, not giving it back,” Yamachika said. “That’s why you have human services agencies.”

The political process that brought the hotel tax and earned income credit bills to the tipping point was more dramatic than most.

Observers agree House Speaker Joe Souki lost some of his influence in a reorganization that shuffled several leadership positions in March, and that political scrum added to the considerable clout wielded by House Finance Chairwoman Sylvia Luke.

That was important during the rail debate because Souki is a committed rail supporter. He told reporters even before the Legislature met in January that he wanted lawmakers to make permanent the excise tax surcharge that now provides most of the funding for rail.

Luke was far more skeptical of the city’s request for a surcharge extension and has reportedly disliked Caldwell since they clashed years ago when Caldwell was a member of the House.

Other representatives were unhappy that the city wanted them to vote for the second time in two years to rescue the rail project by extending the excise tax surcharge, and members of Luke’s Finance Committee interrogated Caldwell for hours about rail finances.

As Luke put it in an interview Saturday, “It is true there was distrust with the numbers, and distrust with the personalities, including the mayor.”

The Senate had drama of its own. Senate Ways and Means Chairwoman Jill Tokuda rejected the city’s request for an excise surcharge extension, but Senate President Ron Kouchi and Transportation Chairwoman Lorraine Inouye staged an end-run around her last week by floating their own proposal for a 10-year extension of the rail surcharge.

Inouye said most senators wanted to extend the surcharge to support the rail project, and representatives of the construction trade unions pushed hard to persuade them to do so. Tokuda’s critics tried to line up votes to remove her, and it is still unclear whether they have entirely abandoned that effort.

“It really was reaching a boiling point, and now you add to the fire this potential threat of reorganization, I guess, because everyone just felt so desperate, and you’ve got the unions and other people involved, adding to this. It always makes it very difficult,” Tokuda said.

The hotel tax proposal emerged as a solution after it became clear the city not only needs more money, but it also needs that money sooner than an excise tax extension would have provided it, Luke said.

The excise tax surcharge will generate about $290 million a year for the rail project until 2027, but Luke said the city needs more upfront money to cover near-term construction costs to keep the project moving. Providing more money for the project sooner should also reduce the borrowing costs for the city.

“It wasn’t just about taxing tourists,” Luke said. “It was really about, how do you find a taxing source that we can grab right away that can help the city and infuse the city with cash, $100 million of cash right away.”

Some lawmakers like the idea of using the hotel tax for rail because it shifts more of rail’s financial burden from Hawaii residents to tourists, but Yamachika and tourism industry officials worry the increased hotel room tax could hurt small businesses and make Hawaii less competitive as a destination.

Luke said she understands those concerns, but “the rail project is a large project, and it is an obligation and a burden that needs to be shared by everyone.”

Tokuda said the earned income tax credit has been debated during almost every one of the 11 years she has been at the Legislature, but it finally passed this year partly because the recent turmoil in Washington, D.C., was on lawmakers’ minds.

There is a sense the economy may slow soon and the federal government may do less to help, which means the states may need to fill in the gaps to help working families, lawmakers said.

The House and Senate are expected to take final votes next week on all remaining bills, including the earned income tax credit and the hotel room tax increase, and are scheduled to adjourn for the year on Thursday.