Available Resources for Counties Mute Need for Sales Tax

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On the counties’ wish list for this legislative session is the authorization by the legislature that would allow them to levy either a county sales tax or a surcharge on the state’s general excise tax. This request is just another whine in a long litany of pleas from the counties that they don’t have the resources to pay for all of the services provided by local government in Hawaii. If one retraces the chronology of the counties, one will find that at every step of the way over the last 30 years, the counties have always argued that they don’t have the resources and that if granted their request, they would no longer pester the state.

At the last constitutional convention in 1978, the counties swore in good faith that if the convention gave them total and complete control over the real property tax, they would never again bother the state, that they would be in control of their own destiny. That promise lasted about five or six years after the counties realized that they could no longer pass back the blame to the state for the growing burden of real property taxes.


There they were back at the legislature in the early 1980s asking for more grants-in-aid from state lawmakers. At one point, the chair of the house finance committee even floated a proposal that would have increased the general excise tax rate to 6 percent to share the additional revenues with the counties provided they promised not to tax residential property. Fortunately, the tax increase could not garner enough support and the proposal failed.

But the counties came back again and again, until finally in 1989, when the state was awash in surpluses, the state offered to transfer the receipts of the liquor and tobacco taxes to the counties. Recognizing the inelasticity of these tax resources, lawmakers deferred adopting the proposal and instead provided a chunk of cash amounting to $70 million in unrestricted grants to the counties for the fiscal year 1990.

When the 1989 Tax Review Commission reported to the 1990 legislature and suggested turning over the transient accommodations tax to the counties, state lawmakers feared losing control over this lucrative source of money. Instead of turning over complete control of the TAT to the counties, lawmakers instead gave them 95 percent of the TAT collections that were generated from the then 5 percent tax rate.

And when lawmakers finally settled on a site for the state convention center, a convention center that was supposed to have been paid for with a 2 percent TAT, instead of taking it out of the collections from the 5 percent TAT, they increased the tax rate to 6 percent. Thus, the counties continued to enjoy the largesse of the TAT. Even when the former governor’s 1998 task force on economic revitalization upped the TAT rate yet again for the purpose of funding visitor promotion, the counties continued to enjoy the windfall of TAT dollars.

So one has to stop and ask, not only do the counties have complete control over the real property tax, but they are also receiving a good part of the taxes paid on the rental of hotel rooms, why do county officials believe they do not have sufficient resources available to fund county programs and services?

The answer is purely political. Local government officials detest the fact that they have to lay their political lives on the chopping block each spring when they set real property tax rates. Since homeowners are apprised of the change in valuation of their properties earlier in the year, they are sensitive to what the county administration and the county councils will do in making changes in the second component of the real property tax equation — the property tax rate. If values have risen sharply, can they expect the rate to be reduced or if values drop, will officials raise the rates to make up the shortfall?

But elected officials don’t like being the bad guys, so they have tended to shy away from raising property tax rates, preferring instead to ride the valuation roller coaster and steal from other sources when the roller coaster is on the downswing. And since elected officials view spending as one way to keep their constituents happy, they have a difficult time turning off the spending spigot.

Ah, but what is great about the way local government is financed in Hawaii is that direct relationship between the setting of the real property values and the commensurate tax rates that maintains the accountability between raising the money and spending the money. To give the counties another taxing power when they have not fully utilized the real property tax would only contribute to the lack of accountability of how local government officials spend taxpayers’ hard earned dollars.

”’Lowell L. Kalapa is the president of the Tax Foundation of Hawaii, a private, non-profit educational organization. For more information, please call 536-4587 or log on to”’ https://www.tfhawaii.org

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