February 2007 | Small Business News
The Search for Honolulu's "Holy Rail"
Brings State's Largest Tax Hike
by Malia Zimmerman
HawaiiReporter.com
The Honolulu City Council voted Dec. 22, 2006, to build a multi-billion “fixed guideway system” from the west side of Oahu to the University of Hawaii. The unions, developers, bankers and big landowners are driving the campaign for a rail transit along this 28-mile route with seven of nine council members on their side. Honolulu Mayor Mufi Hannemann is one of the project’s biggest cheerleaders.
The state Legislature in 2005 gave the city the authority to raise the state’s 4 percent General Excise Tax to pay for the project. Gov. Linda Lingle also gave the rail her blessing on July 11, 2005, refusing to veto the bill that authorized the Council to raise the General Excise tax. The bill is now on the books as Act 247. By doing so, the governor broke her 2002 pledge to voters never to increase taxes. Oahu’s General Excise Tax was increased on Jan. 1, 2007, by an additional 12.5 percent to pay for rail.
Congressman Neil Abercrombie, who personally testifies at the Council hearings, is promising $1 billion in federal funds even though no state outside New York has ever received such an amount from the federal government for a rail project. He claims because newly elected Hawaii Congresswoman Mazie Hirono is on the transit authorization committee and the Democrats now rule the House of Representatives, that Honolulu has the federal connections to get the funds. Never mind that Hirono is as green as the money it will take to fund this.
Council Member Charles Djou, one of two council members against the project because of its extraordinary cost, says a $10 million Alternatives Analysis prepared by a city consultant shows the fixed guideway will cost between $4.6 billion and $6.4 billion. Cliff Slater, head of HonoluluTraffic.com and one of Hawaii’s leading transportation experts, says $4.6 billion is just the start because of operating losses, maintenance costs and bond interest.
With the city’s operating budget at $1.2 billion a year, and the tax hike on Oahu expected to bring in just $200 million a year, it will take years and likely another major tax hike to pay for the 28-mile system. The rail would not be completed for at least 14 years.
Poverty advocates and small business owners are concerned about the tax, noting it is the largest in Hawaii’s history and will impact all goods and services sold on Oahu. Hawaii already is one of the highest taxed states in the nation and has one of the highest costs of living.
When built in 2020, the rail isn’t expected to relieve traffic congestion, according to the city’s own report, but rather create a redevelopment plan around rail using “smart growth.” The train will reach 60-feet-high in several places and cause the condemnation of more than 100 private businesses and homes in Honolulu.
Those expected to profit — large landowners with property around the rail, construction union workers who will help build the largest public works project in the history of the state, and politicians who will get campaign funds for supporting the project.
Opponents say the fix has been in from the beginning because no other alternatives than rail — including a toll road over the freeway much like the one in Tampa that would be built without taxpayers funds — were truly considered by the majority of the Council or the mayor, who are determined to get their “holy rail.”
But Slater says the fight over whether the rail project will actually be built will continue for at least 3 more years.
“The rail has at least three years to go before a shovel hits the dirt. Scoping has yet to be done, The Draft Environmental Impact Statement has to be drafted, public hearings held, and comments taken and addressed. The FTA has to approve the city’s projections in the DEIS, assumedly there will be an SDEIS and hearings, then RFPs will be issued, etc, etc, etc, all leading up to an FTA Record of Decision (ROD).”
Slater, who helped defeat two similar projects in 1992 and 2004, notes these were cancelled after they received approval from the City Council.
“At the end of the multi-year Bus Rapid Transit process in 2004, the FTA withdrew their “Record of Decision” (ROD) and that was the end of that folly. The 1992 effort for a rail project ended six months after the Final EIS had been issued (on a vote of 5 to 4 by the Honolulu City Council).”
Opponents also note that there is a mayorial election in two years and several city council members will be up for re-election. If any of these dynamics change, it could help end the fight over the rail quicker.
Malia Zimmerman is editor and president of Hawaii Reporter. Visit their site at hawaiireporter.com or email her at malia@hawaiireporter.com.
GE Surcharge Will Hurt Hawaii's Economy
by Lowell Kalapa
Tax Foundation of Hawaii
As the Honolulu City Council deliberated last month over which route the proposed mass transit system will take through the core of urban Honolulu, the question arose of whether or not there will be enough money to cover the local share of the project’s cost.
Of course, the half percent surcharge will provide the largest source of the local share although City Council members remain skeptical that it will be enough to pay for the entire project which is now forecast to top $5 billion as the tax will be good only for 15 years.
While the consultants’ estimates professed being conservative in its forecast of revenues expected from the county surcharge, it assumed that there would be no bumps in the economic road.
The problem is that it is obvious that the consultants do not understand the insidious nature of the general excise tax. The fact that the general excise tax is a tax on gross income for the privilege of doing business affects the cost of living and doing business in Hawaii.
First, the tax is not a pass-on like the retail sales tax found on the mainland, rather it is a tax on all the gross income that goes into a business’ cash register including the amount that is sometimes visibly “passed on.”
Thus, the tax is imposed on the amount called the tax and that is charged to the customer in addition to the shelf price of the goods or services purchased.
The consultants also didn=t seem to realize that unlike the retail sales tax found on the mainland, the general excise tax is imposed on all purchases including those made by businesses.
Thus, all goods and services consumed by businesses in Honolulu will incur the additional cost of the county surcharge.
That means everything from copying paper to brooms and mops to clean up a store or office will be taxed at the higher rate. Given that overhead costs must be recovered by a business if that business is to remain in business means that the goods or services sold by the business will cost more.
If the business cannot pass on the additional cost of the tax in the goods and services it consumes in order to keep its doors open because of competition or its customer are not willing to pay the higher cost of the goods and services it produces, it will have to close its doors.
This is the effect that the consultants did not take into account in forecasting how much in revenues will be collected from the surcharge. The consultants= estimates provide for an initial amount generated by the surcharge in the neighborhood of $162 million to $172 million. By the end of the 15-year run, the estimate of revenue from the surcharge ranges from about $300 million to $400 million.
The estimate of revenues from the surcharge in the early years is probably too low as it is expected that most businesses will err on the side of prudence and collect the surcharge regardless of the rules, just to be sure that they are not in violation of the law. However, as businesses and their accountants become more familiar with the law, they will, no doubt, make every effort to avoid having to pay the surcharge.
However, for the less sophisticated small businesses, they will pay the surcharge regardless of the rules and pass it on to their customers and clients. It is these small businesses that are least capable of coping with the additional burden created by the surcharge and what will happen in the first few years following the imposition of the surcharge is that many will simply go out of business because costs will out pace their ability to pass the added costs on to clients and customers.
Since construction on this massive capital project is not expected to begin for several years, there will be little, if any, beneficial effect for the local economy while the surcharge is being collected. The result is that the county surcharge will probably have a negative effect on the economy as a whole as economic wealth is siphoned out of the economic well.
So instead of expanding the economic base, it will shrink. Prices will rise as businesses try to recapture the cost of the surcharge on their overhead, and the surcharge will be added to the higher shelf prices.
Thus initially, revenues from the surcharge will exceed the consultants’ forecast as businesses race to recover as much of the cost of the surcharge by increasing their prices, but in the long run, the impact of higher prices will send many businesses out of business. With less competition in the marketplace, the remaining businesses will have no trouble increasing prices to accommodate the tax.
And despite the tax department=s efforts to save Neighbor Island businesses and families from paying the Honolulu surcharge, the higher cost of doing business will ultimately affect Neighbor Island taxpayers as well.
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