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.
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
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).
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.