Recently, there has been fierce debate over Bill 42 before the Honolulu City Council. Here’s the background: In 2007, the City passed Ordinance 07-001, which says that the Honolulu rail project would be funded only with proceeds of the general excise tax surcharge and federal money. “We’ll never touch the real property tax to build rail,” the politicians said at the time. Bill 42 basically repeals 07-001 to open up other funding sources, like real property tax.
For a long time, I was wondering what the authors of 07-001 were smoking.
For a little while since 2007, the rail project seemed to be on track. Mr. Mayor was out telling all of us that the project will be built on time and on budget.
But then, a little later when the project was being planned and costed out, Mr. Mayor started becoming a frequent visitor to the Legislature. With hat in hand. “We need just a small kine extension of the surcharge,” he said. “A permanent extension would be nice.”
This, of course, started to drive the Legislature nuts. Several legislators wondered out loud why they needed to stick their necks out to extend or increase taxes to bail out the City from its projected cost overruns when the City could just hide behind 07-001 and say to voters, “But WE protected your property taxes.”
As time went on, more and further bailouts were needed. Not only was the GET surcharge extended multiple times, but 2017 legislation added an additional percentage point to the transient accommodations tax to build rail. Some of the bill drafts contained language that would require the City to repeal 07-001 if they wanted a state bailout, but that language didn’t pass. At the same time, the State reduced its skim off the surcharge proceeds from 10% to 1%, freeing up millions more for rail.
Then, the debate turned to whether real property tax, thus protected, was too low. HSTA and others started arguing that low property taxes exposed the soft underbelly of our real estate market to nasty, rotten, foreign speculators. The solution? Enact a surcharge on property taxes to increase funds for education. That conversation, which started in the 2017 session, rose to prominence in the 2018 session, and then dominated the public’s attention while a proposed constitutional amendment to do that was on the ballot. Mercifully, that amendment was dealt a death blow by the Hawaii Supreme Court.
Amid all that, the Federal Highway Administration, which was supposed to be contributing $1.5 billion to the effort, grew increasingly dissatisfied with the City’s skin in the game and threatened to crater the project unless more money was immediately made available to it. 07-001 was in the way. It needed to go. In effect, the Feds were saying that they were not going to dance the same way that the State did; the City needed to show its commitment. Hence, Bill 42 was necessary.
Was Bill 42 a manifestation of promises made and betrayed? I think of it more as a realization that 07-001 represented a promise that was unrealistic from the beginning.If the City wanted to build this project, it needed to be committed; if it weren’t, reality would catch up with it eventually. And by committed I don’t mean the commitment that the chicken makes to give you your bacon and eggs breakfast; I am talking about the commitment that the pig makes. More and further bailouts, by the State, the Feds, or the electorate, won’t happen without consequences. Our City officials need the resolve to make this project work within its means if they hope to avoid those consequences.
Tom Yamachika is the President of the Tax Foundation of Hawaii, a private, nonprofit educational organization dedicated to informing the taxpaying public about the finances of our state and local governments in Hawaii. Tom is also a tax attorney in solo practice and has been since early 2013. Prior to 2013, he was with the accounting firm Accuity LLP, which was formed in 2006 from the Honolulu office of Coopers & Lybrand (which later became PricewaterhouseCoopers). Before that, he served as an Administrative Rules Specialist in the State of Hawaii Department of Taxation from 1994 to 1996, where he drafted rules, interpretive releases, and legislation on several different state taxes. Prior to that, he practiced litigation and tax law with Cades Schutte Fleming & Wright in Honolulu.
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Honolulu Rail Transit file image.