Ka Wai Ola - Office of Hawaiian Affairs, Volume 6, Number 5, 1 May 1989 — Taxes and You [ARTICLE+ILLUSTRATION]

Taxes and You

By Lowell L. Kalapa, Director Tax Foundation of Hawaii

Helpina the Counties' Finances With Tax Dollars

One of the major financing issues whieh faced the legislature during the past session and whieh will continue to plague lawmakers is the counties' continuing plea for financial help. The plea for help is not new, in fact, there is a lonq historv behind

the story of financial assistance for the counties. The story really begins in eamest in the mid1960's when after some study, certain functional responsibilities were passed between the state and counties. For example, the state school system or the Department of Education was transferred from the various county departments of public instruction to the state. Similarly, the county hospital system was unified under state control and Iater the county jai!s became a part of the statewide community correctional facilities unit. At the same, time, the state established a formula to share a portion of the 4 percent general excise tax collections with the counties. The formula evaluated the "fiscal capacity and the fiscal need" of eaeh county and apportioned funds accordingly. This seemed a fair and equitable way of determining state grants-in-aid to the counties. All was well until a federal law eall the State and Loeal Fiscal Assistancē Act of 1972 eame along. This federa! law is better known as the federal revenue sharing act. As one of its provisions, it required that any state whieh wanted to receive moneys under the federal revenue sharing program had to promise to reduce its state aid to loeal governments or counties below what those loeal govemments had been receiving just before the Revenue Sharing Act was adopted by Congress. Well, faced with that ultimatum if the state of Hawaii was to get some of those federal revenue sharing dollars, the state legislature added a phrase to the grants-in-aid law to insure that the counties would not receive any less in grants than they did in 1972 in order to comply with the federal edict. One would assume that this guarantee would be welcomed by the counties. However, rather than

acting as a "floor" or minimum for state assistance, the phrase became a ceiling or maximum in grants to be made to the counties. Thus, the law was interpreted to be a limit on the amount of grants-in-aid. Thus, the so called "Act 155" grants in aid to the counties have not grown, causing a lot of consternation at the county level. Frustrating this situation was the fact that while the counties set property tax rates and received the property tax revenues for their operations, the real property tax policies were set by the state legislature. This meant that the legislature determined how large the home exemption would be, how property was assessed and who would be exempt from the property tax. Well, the counties went to the 1978 Constitutional Convention and convinced delegates that if the counties were given total control over the property tax, they, the counties would be able to manage on their own. Well, the Con-Con decided to put the question to the electorate and the counties were given the administration and policy-making powers over the real property tax. Unfortunately, only after the counties actually got their hands on the tax did they realize that the property tax is the least liked of all of the taxes levied in Hawai'i. Largely because the tax must be paid in two semiannual lump sums, the property tax is looked upon with some disdain. Although the various county officials attempted to mitigate some of the sting of the property tax by shifting the burden to non-residential classes of property, in recent years, this strategy has begun to catch up. The alternatives are now either to raise the property taxes on residential properties or to seek other sources of revenues. In the latter case, the counties have attempted various game plans — from seeking the option to impose an additional 1 percent increase in the general excise tax rate for the benefit of the counties— to asking that a portion of the current 4 percent levy be earmarked for the counties. This past session the state administration eame up with the novel idea of giving the counties the collections realized from the liquor and tobacco taxes. Unfortunately, as it was pointed out during hearings and debates, these tax sources do not hold

mueh promise of growth as consumption is expected to stagnate if not fall in the coming years. Thus, the counties would be saddled with a tax that would not meet its financial needs in the future. Indeed those needs will be great as the population continues to grow and the demands made on the county infrastructure by the growing numbers of visitors also grows. One source of funds whieh deserves increasing attention as a stable and growing source for the counties is the newly enacted transient aeeommodations tax (TAT). Unlike the liquor and tobacco taxes, the amount collected will grow in direct proportion to the number of visitors to Hawai'i. Further, itshould be remembered that the industry was willing to accept a tax rate of 2 percent so long as the funds were earmarked for the construction of a convention center and additional visitor promotion. However, the legislature adopted a 5 percent rate and earmarked none of the funds for either cause. And while for years, residents thought that a hotel room tax would make visitors pay "their fair share," state lawmakers have not made any eoncerted move to reduce taxes on residents. Thus, if the TAT is continued to be imposed, it just might make sense to give it to the counties as means of alleviating the demand to raise real property taxes so long as priority is given to additional visitor promotion and, if needed, the eonstruction and operation of a convention center.