Keeping the money drives cost of utilities up

Constitutional Convention that has had a long-term impact on the way government

does business in Hawaii was the transfer of the power to impose the real

property tax from the state to the counties.

The real property tax had

been one of a number of targets for the counties as means to find alternative

sources of funding for county operations. Proposals had ranged from giving the

counties the power to levy an income tax to an additional rate on the general

excise tax. However, the more obvious tax was the real property tax at the

counties had been the beneficiaries of this tax for years.

While the

counties received the benefits, that is the collections of the tax, and did

have the ability to set the real property tax rate, the policy, as reflected in

the tax, was set by the state legislature. In fact, the counties had very

little control over their financial destiny through much of the early years of

statehood. As late as the days just before statehood, the territorial treasurer

determined how much each county would get out of the real property tax and for

many years there was actually a dollar cap on how much real property taxes

could be raised.

Thus county officials came to the 1978 Constitutional

Convention with a vengeance, they wanted autonomy insofar as their fiscal

destiny. They promised convention delegates that if they were given the power

over the real property tax they would be able to raise the money they needed to

operate their governments and that they would never again have to bother the

state legislature.

Others, like the Tax Foundation, saw numerous flaws in

the idea of giving the counties complete control over the real property tax. A

major hurdle would be to keep track of each county and how they decided to set

policy for each county wanting to do its own thing. Indeed the convention

delegates thought that if the counties went out and did their own thing

immediately, it would turn the property tax situation into turmoil. Convention

delegates also felt that once the counties had the power over the tax they

might regret it.

As a result, the convention delegates added a provision

to the transfer of the property tax to the counties which basically mandated

that the counties adhere to a uniform method of assessment in all counties and

required the counties to honor all existing exemptions and dedication

provisions for an eleven-year period. Why eleven years? Well, with a mandatory

call for a convention required every ten years, convention delegates thought

that another convention may want to take a look at the situation before that

eleven-year period expired.

As history now knows, the eleven years came

and went and the counties continues to administer and control the real property

tax. However, that is not to say that they went away and never bothered the

state again. On the contrary, less than ten years later, they were back at the

legislature asking for another source of financing and this time they came away

with a portion of the transient accommodations tax (TAT).

While the

counties continue to manage the real property tax, one more problem remains in

consummating the complete transfer of the tax and that is the exemption of

public utility property from the tax provided under state law. The tax that

public utilities pay, called the public service company (PSC) tax, is imposed

in place of the general excise tax and the property tax. It is that latter tax

that continues to bother county officials.

The state tax paid by

utilities imposed a rate higher than the general excise tax rate of 4%

theoretically to account for the amount that the utilities would otherwise have

paid in property taxes. The problem is that the exemption from real property

taxes has continued, thus preventing the counties from collecting property

taxes from these businesses.

Now one county has decided to impose the

property tax despite efforts to seek a sharing of the revenues the state

currently collects under the PSC tax. Since the state refused to share those

revenues, the counties seem to be justified in getting what is truly theirs.

The long and short of it is that if the state does not share the receipts

of the state tax nor does it lower the tax rate to 4% and the counties begin to

impose the real property tax, the only losers in this equation will be the

customers of the utilities. It seems that if the state is unwilling to lower

the rate, then it has a responsibility to share those revenues with the

counties as a means of preventing the imposition of the real property tax on

utilities and ultimately their customers in what amounts to a double tax.

Lowell L. Kalapa is executive director of the Tax Foundation of Hawaii.