Deal cuts state
income tax

Personal income taxes will be
cut by $752 million over four years

By Mike Yuen
Star-Bulletin

Isle lawmakers have agreed to cut personal income taxes by $752 million over the next four years, clearing the way to adjourn this year's legislative session tomorrow, eight days late.

The breakthrough came when Gov. Ben Cayetano, with the help of Senate dissidents, pushed Senate leaders into granting more substantial tax relief than the 1 percentage point cut over two years that the Senate majority was advocating.

Cayetano did it yesterday by threatening to not extend the session again. He had leverage because nine dissident senators -- seven Democrats and two Republicans -- led by Sen. Randy Iwase (D, Mililani) wrote to Cayetano saying that no further extensions should be granted unless meaningful tax relief was accomplished.

Without the cooperation of the dissidents, the 25-member Senate did not have the two-thirds majority needed to join the House in extending the session on their own.

"The governor checked with us, asked us if we were solid and if we would be behind him," said Sen. Joe Tanaka (D, Kahului). "We said we would."

The sudden movement generated by Cayetano stood in sharp contrast to how yesterday began. Shortly after arriving at the state Capitol, House Finance Chairman Calvin Say (D, Palolo) told reporters that he was frustrated and ready to break off talks with the Senate on tax reform and other key fiscal issues.

He was willing to let the session end because his private negotiations with Senate counterparts had been moving much too slowly, Say said. With the supplemental budget wrapped up during the weekend, he felt comfortable that the House could walk away, Say added.

After meeting yesterday with Cayetano and their House counterparts, Senate leaders accepted Cayetano's plan.

Cayetano's initiative expands all income-tax brackets, lowers the tax rates for each bracket and creates a lower-income tax credit by abolishing the food-tax credit, which Cayetano has long believed was unnecessary for middle- and upper-income taxpayers.

Under Cayetano's plan, a family of four with an adjusted gross income of $35,000 a year will save $1,152 over four years. For a family of four earning $50,000, the savings will be $1,893.

House and Senate conferees accepted the plan 50 minutes before a midnight deadline.

The state Constitution requires that bills be in their final form for 48 hours before final votes are taken.

Earlier yesterday, conferees approved raising the hotel-room tax from to 7.25 percent from 6 percent and imposing the equivalent of the hotel-room tax on time-share vacation rentals.

The time-share occupancy tax is substantially less than the hotel-room tax -- about $2.50 a day, said Senate Ways and Means Co-Chairwoman Rosalyn Baker (D, Lahaina).

But that did not allay the concerns of Rep. Lei Ahu Isa (D, Puunui), who has worked in the time-share business. The tax is unconstitutional and no other state has a time-share occupancy tax, she said.

The allocation of the hotel-room tax revenues left many neighbor island lawmakers and county mayors upset since the four counties' share drops about $24 million annually.

Honolulu Mayor Jeremy Harris asserted that diminished hotel room tax revenues means "we have really no alternative to either lay off more people or to raise property taxes."

But Say, emphasizing the dire straits Hawaii's economy is in, said: "In the overall good, I think everyone of us should feel some of the pain that we are going through."

Late last night, after House and Senate conferees had officially agreed to his tax-relief plan, Cayetano said the Senate money committee "was pretty much uncompromising" during negotiations with the House.

When talks began, he didn't see flexibility and reasonableness at the beginning, but at the end he did, Cayetano said.

Senate President Norman Mizuguchi (D, Aiea) said: "I think the people received a good personal income tax cut. How it was done is not important."

According to House Speaker Joe Souki (D, Wailuku) and other legislative leaders, the House and Senate prior to Cayetano's intercession had already agreed to provide income-tax relief; the question was to what extent. Also, the Senate was pushing tax credits and exemptions that Cayetano and the House saw as diluting personal-income tax relief.

"What the governor's intercession did was to increase the tax break in the personal-income tax," Souki said. "I think he drove a pretty hard bargain there. We sat down and made some choices. The choices were we did away with a lot of the credits and exemptions and we went for personal-income tax (cuts)."

House Finance Chairman Say said the tax cuts are possible because of savings from recalculations on state workers' pension costs, reimbursements from overpayments to the state's public employees health fund, raids on several special funds surpluses and increases in state fees.

"We will still send a message that the state of Hawaii is interested in having businesses in our state by the example of lowering our personal-income taxes," Say said.

Hotel room tax

Here are highlights of the increase in the hotel-room tax that House and Senate conferees negotiated:

Raises the tax to 7.25 percent from 6 percent.

Allocates $70 million annually for the counties, about $24 million less than what they received previously.

Creates a Hawaii Tourism Authority, which will receive $55 million annually for tourism promotion, double the usual appropriation.

Allocates $25 million annually to pay the debt service on the new $350 million Hawaii Convention Center.

Time share tax

The bill raising the hotel-room tax also imposes a similar tax on time-share vacation rentals. Highlights:

It is expected to generate $1.5 million to $3 million annually.

Tax formula is linked to a time-share's weekly maintenance fee; the daily time-share vacation rental tax would be about $2.50 a day.

Note: Distribution of the hotel-room tax is based on an allocation formula and is not limited by a cap. Therefore, the counties, the tourism authority and the convention center would get more if more tourists visit.