October 1991 Home   Newsletters

November 1991

December 1991

Farewell to Reform
Council Approves Rail Transit Development Agreement (Astrid Monson)
Summary of Rail Transit Capital Financing Plan
Consensus Questions (Health Care)
Architectural Planner Donald Monson Dies (Murry Engle)
General Membership Meeting

Council Approves Rail Transit Development Agreement

On November 14 the City Council by a 5 to 4 vote in favor, adopted Bill 112, an ordinance authorizing Mayor Fasi to enter into a Development Agreement with Governor Waihee in accordance with 1991's State Acts 183 and 184. In effect, the Development Agreement authorizes the Agreements submission, after execution by the Mayor and the Governor, to the 1992 State Legislature. Included is a 10 year financial plan covering construction costs of the rail component of the bus-rail system.

These, in 1991-2002 "year of expenditure" dollars, total $2.247 billion, of which $618 million is to be contributed by the Federal Government (UMTA); $1.865 billion is to be raised from the 1/2% surcharge on the State 4% General Excise Tax, and $100 million from State and City General Funds. In addition, $911 million will be raised from bonds issued between 1993 and 1997 and repaid out of the surcharge tax proceeds by 2002.

This information was released by the City for the first time on October 3. For the next six weeks the City Council, the press and the public tried to get a clear picture of what the City was actually proposing and what the costs and tax burden really would be. No totals were given for either revenues to be raised or expenditures to be paid out -- only a year-by-year "cash flow" spread sheet. The only table of totals made available was League's, which was published on October 6 as an appendix to a carefully documented "ANALYSIS of Impact of 1/2% Excise Tax Surcharge on Oahu Households 1993-2002." (Copies available at League office)

Our major findings, and the table, follow:

  1. The City administration and the media keep repeating the claim that through a State income tax credit in exchange for raising the General Excise Tax by 1/2 %, the $2 billion rail system will cost Oahu households only $4 to $15 each household per year for 10 years.

  2. We have analyzed this claim and conclude that the actual average amount will be $408 per household, or $4,080 in ten years. Our summary table shows that the City now expects the construction cost of the rail system (in yearof-expenditure dollars), excluding the Waikiki segment and the Hotel Street subway, to be $2.247 billion. Of this, $1.865 billion would be paid for by the 1/2% surcharge.

  3. The excise tax is paid not only at the retail level but by manufacturing, wholesale, service and other business establishments as well, Since they get no State tax credit, they pass the added costs on to their customers, thus increasing prices all along the line.

  4. Though tourists pay a share of the added tax at both retail and other levels, the proportion is between one-fourth and one-third -- the balance is paid by residents either directly at the grocery store or in higher prices.

  5. The tax credit itself has to be factored in. As the State Legislature's 1990 Joint Conference Committee Report No. 163 says, "The county government establishing the surcharge will receive the revenue, while the State will pay out the credit from State revenues." Whether these come out of the General Fund, are borrowed, or reduce resources available for education, housing, health, etc., the money comes out of our taxes one way or the other.

  6. We estimate the following annual averages, assuming 300,000 households in 1997:

    Tax surcharge revenue, total Oahu Total
    $186.5 million
    Per household
    Paid by tourists
    From tax rebate
    Net surcharge  
    Paid by residents
    Paid by businesses
    Assume 24% recouped from tourists
    76% paid by residents
    Net surcharge paid by residents, total62.7209

  7. Since, however, the income tax credit itself reduces State income tax revenues and prevents using the money for other purposes or for debt service, it is equivalent to an additional tax paid. Adding it back in increases the total cost of the surcharge tax to residents to $122.4 million a year ($62.7 plus $59.7), or $408 per household. This amounts to $4,080 in ten years.

  8. This does not include the $100 million in State and City funds allocated to capital funding in ].992. Spreading these over the 10 year term would add $10 million a year, or $33 per household per year, to the above totals, giving us a total tax burden of $441 per household per year, or $4,410 for the period.

  9. None of these figures include cost over-runs, change orders, under-estimation of costs not included in the main contract (line 11), such as land acquisition, relocation of utilities, and station finish work -- any or all of which could add materially to the total tax burden as calculated above.

  10. They also do not include Operations and Maintenance costs, nor replacement reserves. Increased fares -- $1.50 has already been mentioned by a responsible City official -represent an additional burden.

  11. Omitted entirely from our analysis is discussion of the regressivity of the General Excise Tax, which has been explained in detail by the State Tax Commission and more recently by the Tax Foundation. Very low income families will get a tax credit -- if they use it at all -- of only $18 under the law, which is far less than the tax surcharge will cost them, plus paying increased costs passed on to them by businesses. As has been widely documented, excise taxes take a much larger portion of their income than they do of high-income families, who can get tax rebates of up to $450 under the law.

Though our ANALYSIS was widely distributed to the press, TV, radio, etc., it received little attention. The City finally withdrew its statement (based on State figures) that the cost per household would be only $4 to $15 per year. The State raised the ante to $20 to $40 per person per year but believed business would absorb much of the increase, resulting in a "net cost" to a poor family of four of only $1 a year, after tax credits.

Then the Committee for Sensible Transit came out with a block--buster $608 per 4-person family per year. This figure was ridiculed by such persons as Council member Donna Mercado Kim. League pointed out that if the 25% or 30% of the surcharge tax paid by tourists was subtracted, COST's figure would be close to League's $408 to $441. (See above, points 7 and 8.)

By this time the fur was flying. Finally, on November 7, twenty-one UH faculty members mostly from the Department of Economics -- issued a report challenging many of the City's figures including ridership and costs as well as the tax burden.

To quote the November 8 Advertiser, "economics professors Walter Miklius and James Moncur, specialists on Hawaii's State tax system, said they believe the real cost per family of four will be approximately $4,600 over a 10 year period .... Professor James Roumasset, who teaches public financing, said he believes the figure may actually be closer to $10,000 per family if minimal cost overruns are included and the cost per family is stated in 1992 dollars."

League's Transit Study Committee cannot but be gratified at the almost uncanny similarity between the professors' conclusions and our own.

Several of the Council majority emphasized that they were voting "yes" only to keep the project alive, to give the City a chance to complete its planning and a final Environmental Impact Statement. Council member Mirikitani, the swing vote, stated that if he were not satisfied with a promised revision of the bases of the regressive Excise Tax surcharge, he could not continue to support the project.

It is too early to know just what the Council's decision means in the long run. Many more steps need to be taken before the decision is final. Stay tuned.

Astrid Monson

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