Dinengdeng & Pinakbet

Ways and Means Chair Donavan Dela Cruz (6th from left) confers with Vice-Chairman Gilbert Keith-Agaran (6th from right) during the special session.
Photo courtesy Hawai‘i Senate majority

Real talk about funding on both the State and County levels of our government.

My alma mater Maui High School annually holds a dinner during Homecoming week to honor alumni, faculty and friends of our school. Past honorees of the Maui High School Foundation include inspirational local speech teacher at that other school Charlotte Boteilho ’68, my high school science teacher Edwin Ginoza, my high school principal Calvin Yamamoto, historian and writer Inez Ashdown ’18, and auto technology instructor Dennis Ishii ’66. Legendary football coach Curtis Lee ’66, athletic director and coach Izumi “Shine” Matsui, and longtime track and field coach Odell Marinia, and swim coach Spencer Shiraishi ’45 represent the proud Saber athletic history. My classmate and innovative community builder Stanford Carr ’80, wireless technology pioneer Harrison Miyahira ’58, A&B Properties executive Grant Chun ’79, Island Movers executive Donald Takaki ’59, retired state judge Harriet Holt ’44, and tax reform advocate William Tavares ’39 signify alumni in business and civic life. Musicians in the Hall include noteworthy band teachers and music directors James Kidoguchi and Kerry Wasano ’89, and local entertainer Uluwehi Guerrero ’76. Veterans venerated include Hawai‘i National Guard Brigadier General Glen Sakugawa ’66 and courageous special forces team member Kraig Vickers ’92. Longtime supporters of the school Dr. Frank Baum & Dr. Colleen Inouye, who annually sponsor Valedictorian awards, also hold respected places.

Not surprisingly, the Hall also includes people who have helped shape our island and state in politics like former teacher, Maui Mayor and Speaker of the House of Representatives Elmer Cravalho ’44, and distinguished Congresswoman Patsy Takemoto Mink ’44. More recent awardees include leaders that shaped Maui, Lt. Governor Shan Tsutsui ’89, former Maui County Council Chair and former Executive Director of Maui Economic Opportunity Gladys Baisa ’58, and Maui Mayor Alan Arakawa ’69.

This year, one of the honorees is the late Mamoru Yamasaki ’35. A lifelong bachelor, Senator Mamoru Yamasaki served more than thirty-three years in territorial and state legislatures, distinguishing himself as an advocate of children and education. As Chair of the powerful Senate Ways and Means Committee for a dozen years, the low-key legislator played a key role in funding state services and building and upgrading local schools, athletic fields, roads, airport, hospital and the UH Maui College.

Maui Nui historically has wielded an out-sized role, given our population, in our State history. Speaker Cravalho appears in that famous picture receiving the call that Congress had approved the Statehood Admissions Act. During portions of the mid-1970s to the mid-1980s, Maui residents Joe Souki and Mamoru Yamasaki held the chairs of House Finance (FIN) and WAM at the same time. During their WAM-FIN heyday, Rep. Souki and Sen. Yamasaki, and the Maui legislative delegation brought home over four billion dollars for highways, hospitals, airport terminals, schools, cafeterias, libraries, community centers and much more. Souki went on to serve as House Speaker twice, most recently from 2013 until earlier this year. In recent years, Maui residents Bob Nakasone, Kyle Yamashita and Shan Tsutsui have been responsible for determining the State’s Capitol Improvements Projects (CIP) budget. Tsutsui, of course, went on to be the first Maui resident to lead the State Senate and then became Lt. Governor. Rep. Yamashita continues to lead the Finance Committee on CIP. Others in the Maui delegation continue to hold influential positions in the legislature.

But Maui only has three members in the twenty-five member Senate and six members in the fifty-one member House. Neighbor Islander legislators hold only eight seats in the Senate and sixteen in the fifty-one member House. Maui and its sister-counties have been successful advocates over the years by working cooperatively and smartly with their O‘ahu colleagues.

A friend recently asked about my votes in favor of SB 4 in the Special Session which provides additional authority for the City and County of Honolulu to fund its controversial rail project. I told him it was the right vote for Hawai‘i at this time even though all of my Neighbor Island Senate colleagues other than the Senate President voted against the bill. Four of Maui’s six member House delegation, two of Kaua‘i’s three Representatives and three of the seven Big Islanders Representatives also supported the compromise bill. Neighbor island residents have generally and understandably been leery of being pulled into funding O‘ahu’s costly mass transit system.

Interestingly, when Souki and Yamasaki served as legislative money chairs, they worked on the first proposals to develop mass transit on O‘ahu. The pundits even called the proposed train the Yama-Souki. The Yama-Souki never started since the Honolulu City Council rejected the tax increases needed to fund it.

Taxes, the State and
the Counties

In Hawai‘i, the State Constitution gives the legislature broad taxation authority. The four Counties have limited taxation authority. The Constitution grants Counties only authority over Property taxes, vehicle and weight taxes, and public utilities franchise tax. But until 1989, the Counties did not even have statutory authority to set real property tax rates themselves.

For many years before and after Statehood, the Counties requested State grants from the legislature to assist County operations. In territorial days until the early years of Statehood, the Counties actually received a portion of the General Excise Tax (GET) based on a formula. In 1965, the Counties began receiving funding through grants-in-aid. The GIA amounts ranged from $9.363M in 1966 to $19.5M by 1972.

General Excise Tax (GET)

The State GET is one of the main sources of revenue for the State general fund, and accounts for about 50% of that fund. It is a broad tax that covers almost all goods and services sold or provided in Hawai‘i. The GET brings in a lot of revenue, and most residents and businesses pay this tax in some way or another with approximately 30% of collections paid by visitors while on vacation in Hawai‘i. The general fund supports all State services, including schools, hospitals, social services, health inspectors, the University of Hawai‘i campuses, and county ambulance services. Until the passage of SB 4, 10% of the O‘ahu-only rail surcharge was also deposited into the general fund (since 2007, as a result, approximately $193M has been allocated to general State services, including those provided to the neighbor islands).

According to the 2012 census estimates, Honolulu County represented 70% of the State population. In 2015, O‘ahu taxpayers generated 75% of the State personal income (2015, University of Hawai‘i Economic Research Organization). With its large population, Honolulu generates most of the State GET. I would note Maui County Council Chair Mike White is also correct when he points out that the City and County of Honolulu has a broader economic tax base (for example, Maui sees little in defense spending other than what is provided at Haleakalā and the Maui High-Technology Park, while O‘ahu has civilian jobs at the Pearl Harbor Naval Shipyard, and military jobs at Joint Base Pearl Harbor-Hickam, Marine Corps Base Kāne‘ohe, Schofield Barracks, and a growing Cyber-security role, as well as the spending by military dependents). Maui, in contrast, in the last two years has seen the closing of its last large agribusiness operation and has become more dependent on the visitor industry and construction.

In June 2017, O‘ahu taxpayers contributed approximately 86% in total tax collections and 85% of the State GET collections. Maui tax collections was 6% in total collections and 7% of the State GET. Hawai‘i county collections were 6% for both total and GET, and Kaua‘i county was 2%. O‘ahu also generates 60% of vehicle taxes but more than half of all money collected goes to support roadways on the other three Counties. Simply said, O‘ahu residents contribute a larger percentage of their income to GET than neighbor islanders (even if you subtract the rail surcharge that only applies only to O‘ahu-generated transaction).

While the GET is a significant source of State revenue and has been the source for paying rail costs, there are some disadvantages to raising the GET compared to the State Transient Accommodations Tax (TAT)—what we commonly call the hotel room tax. Approximately 70% of the GET is paid by residents, and 30% by visitors. In short, the GET takes a much bigger bite out of Hawai‘i resident’s pockets than the State TAT. In contrast, ninety percent of the State TAT is paid by visitors.

Another significant concern is that the GET is a “regressive” tax. It’s considered regressive because lower income residents pay a much higher percentage of their income in GET than residents with higher incomes. So the GET not only hits residents harder than visitors, it hits our neediest residents hardest of all, while those with more disposable income pay a smaller share of their income to GET, even though they may buy more.

Since 2007, Honolulu has received for rail a 0.5% surcharge on the State GET. Honolulu officials received a ten-year extension of the State GET surcharge two years ago. The City returned to the legislature to request another extension although its Mayor also said he preferred making the surcharge permanent. In the first two approvals, the other three Counties were given the opportunity to impose similar State GET surcharges to support their respective transportation needs. None of the other Counties chose to act on those opportunities.

Transient Accommodations Tax (TAT)

Much of the discussion leading up to the Special Session was about the proposed hike in the State hotel room tax. The State TAT, contrary to what some County officials contend, is not a County funding source. Nor was it initially a fund to help market tourism. A Senate colleague who served at the time tells me the State TAT was passed to support State general services.

The legislature established it in 1986 at a rate of 5%. Since then, the State TAT has risen from 5% when it was first implemented in January 1987, to 6% in July 1994, to 7.25% in January 1999, to 8.25% in July 2009, and most recently, to 9.25% in July 2010.

Following the creation of the hotel room tax, State tax moneys provided to the Counties were gradually shifted to the State TAT. In 1987, the Counties received $12M. In 1989, that amount rose to $20M.

When the Hawai‘i tourism industry wanted a “world-class” $350M convention center, the industry and the legislature identified the existing State TAT as a funding source for construction and then for servicing of financing. The uses for the State TAT have shifted over time. The State TAT presently is split between the Counties ($93M), Convention Center ($33M), Tourism Special Fund ($82M), State Parks and Trails projects ($3M), and financing the purchase of the Turtle Bay conservation easement, with the remainder allocated to the State General Fund. Under the new rail bill, the Counties’ portion of the State TAT will increase approximately 10% to $103M.

Almost all of the State TAT (hotel room tax, 90%) is paid by visitors. Local residents who stay in hotels on their own island, or in most cases, on O‘ahu, also pay the State TAT (local residents are estimated to pay 10% of the total State TAT collected).

The average hotel room in Hawai‘i costs $254. The 1% State TAT hike approved in SB 4 will add $2.54 per day to a visitor’s hotel room bill. That approximate $3 amount is what alarms Hawai‘i’s hotel industry even though many of our hotel operators regularly added larger amounts in “resort fees” on top of their room rates for the use of amenities such as pools and towels, free wi-fi or the gym. Valet parking at Hilton Garden Inn in Waikīkī recently cost Alfredo Evangelista $35 per day. These resort fees add much higher daily amounts to hotel room stays than the 1% increase in the State TAT.

O‘ahu Taxpayers Subsidize
the Neighbor Islands

Hawai‘i, first and foremost, operates largely from a statewide funding basis and we have done well by taking care of each other. O‘ahu taxpayers simply pay more than their share of taxes based on the services they receive from the State. To put it bluntly, O‘ahu taxpayers subsidize a variety of services on all the neighbor islands. Maui Nui receives more subsidies from the State than the share of State income (in the form of taxes) Maui County generates.

Consider that the State has provided much needed services to Maui County in addition to the services I mention above that the general fund covers. State moneys (mostly provided by O‘ahu taxes) have been used to drill water wells in the ‘Īao and Waihe‘e aquifer that were then turned over to the County of Maui to use as part of the Department of Water Supply system. State moneys, including O‘ahu taxes, were used to pay for the Central Maui Regional Park with an additional $1M recently released by the Governor and Lt. Governor to complete that County of Maui park. Kahului Airport brings in enough revenue to cover itself but the State also pays expenses for Lāna‘i, Molokai and Hāna operations which cost more than they generate, and for Kapalua, which is not eligible for federal support. Vehicle weight taxes from O‘ahu also help the neighbor islands maintain State roadways.

In other words, there are many important projects and services that benefit the Counties and their residents that are actually paid for by State moneys, including O‘ahu taxes.

The Rail Funding Bill

In order to cover the cost of completing the rail project, some Senators, the City and County of Honolulu, and the Hawai‘i Authority for Rapid Transportation (HART), wanted the legislature to authorize extending the GET surcharge an additional 10 years. Our poorest residents have already carried the burden of the cost when the legislature allowed the City to impose an O‘ahu-only surcharge on the GET to cover the rail project. Extending the surcharge for another 10 years would have continued to force our poorest residents to bear the heaviest burden of the project cost, and past overruns. Splitting the remaining costs between the GET (only for O‘ahu transactions) and the State TAT, will place some of the cost for rail on visitors and reduce the burden on our residents least able to pay. Using only the GET for the cost would mean only approximately 30% of that extra cost would be borne by visitors. While there was not much discussion about the issue, failure to act would have also raised the issue of the FTA demanding the return of the $800M in federal funds already spent on the project and how that money would be raised (the GET surcharge was only authorized for construction costs).

State TAT collections also will allow the City to pay more costs upfront which will reduce the financing costs of the project, saving up to $2B in costs for O‘ahu’s taxpayers.

When SB 4 came before the Senate Ways and Means (WAM) committee, neighbor island leaders and residents testified against the proposed State TAT hike. WAM members did not argue with the neighbor islanders on that issue.

When SB 4 was heard in the joint House committees of Transportation and Finance, however, O‘ahu legislators were not as kind. They took open umbrage at the neighbor island council members who appeared to argue that the State TAT was County money. The arguments posed by the neighbor island council leaders—which reflected their constituents’ sentiments—clearly irritated some O‘ahu House members on the Finance committee.

Gilbert S.C. Keith-Agaran represents Central Maui in the State Senate. He serves as Assistant Senate Majority Whip and, as the Vice-Chair of the Senate Ways and Means Committee, is responsible for negotiating State capital improvement projects with his House counterpart.

SB 4 will also allow Maui County, Kauai‘ County and Hawai‘i County a third opportunity to pass their own ordinances to create a GET surcharge for transportation expenses, and perhaps reduce County gas taxes presently used for those purposes. You may be aware that Maui’s gas taxes are the highest in the State.

No one denies the huge problems associated with the rail project to date. Consequently, SB 4 includes State oversight of the remaining rail project costs. The State will no longer simply write checks to the City for the moneys collected for rail. The funds will be paid to the City and HART only after review and certification of construction-related expenses by the Department of Accounting and General Services (DAGS). The bill also provides for an audit of the project.
The O‘ahu Rail project is approximately 45% complete. Many of the early cost overruns on the project occurred from some contracts the city agreed to before the HART management was created. We expect that the new management at HART will do a better job finishing the rail project than their predecessors.
Voting in favor of SB 4 was not an easy decision. It could not have been easy for any neighbor islander given the opposition expressed by many of our neighbors, family and friends. However, I am conscious of the need to ensure there will be GET funding in the future for other important problems across the state. Long-term, the State of Hawai‘i has many important public infrastructure and services that will need to be funded in upcoming years. For example, we will need more services to accommodate our growing elderly population, to continue addressing repair and maintenance, including cooling our local schools and our colleges, and to pay down the unfunded public pension and health care liabilities. Continuing to dedicate additional GET revenues only to the O‘ahu rail system would reduce options for meeting those obligations.

Finally, I want to be sure my O‘ahu colleagues will continue to support Maui projects as they have done in the past. I mentioned at the beginning that only eleven neighbor island legislators voted in favor of SB 4. Maui, Kaua‘i and the Big Island hold only eight of the twenty-five Senate seats and only sixteen of the fifty-one House seats. Advocating for our home islands and counties requires the help and support of our O‘ahu colleagues.