Excise tax hike
would fund rail

A Senate committee approves
a measure to pay for building
an Oahu transit system

Lawmakers who began the session discussing tax cuts for the middle class think they might have found a way to do that while also raising money for an Oahu transit system.

The solution: increase the general excise tax.

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A Senate panel approved a 25 percent hike in the state's general excise tax yesterday to generate funds for the construction of a light rail system on Oahu and general transportation projects on neighbor islands.

After funds are set aside for such projects, leftover money would be put toward tax relief measures such as raising the standard deduction and food and excise tax credits that were discontinued in 1994.

The excise tax would go to 5 percent from 4 percent on Jan. 1, 2007, but would only do so if the City and County of Honolulu approves a plan to build a light rail system by Jan. 1, 2006.

Senate Ways and Means Chairman Brian Taniguchi advanced the tax hike proposal over one that would have granted counties the authority to raise taxes for transportation projects.

"This is probably a little bit closer to reality about what's going to happen," said Taniguchi (D, Moiliili-Manoa). "If you have different counties with different tax rates, then it creates a lot of confusion. It's probably better for the state to do it (raise taxes) ... then provide some tax relief, and that's really what we're trying to do."

Similar attempts have been made in recent years to raise the general excise tax -- which is applied to virtually every transaction in Hawaii -- to fund a rail system and for education programs that were in danger of being cut. Those attempts failed.

The tax generates about $1.8 billion a year.

State Tax Director Kurt Kawafuchi said the Lingle administration supports food and medical tax credits and raising the standard deduction for income tax filing -- which could remove thousands of the lowest wage earners from tax rolls -- but is opposed to any tax hikes this year.

"A general excise tax increase would hurt the people who are at the lower end because they have to spend a higher percentage of their money on food clothing, rental housing, shelter -- daily living," Kawafuchi said.

Taniguchi said the tax hike is expected to generate at least $320 million a year, with $200 million a year going to the City and County of Honolulu for 10 years. Another $20 million a year each would go to the Big Island and Maui, with $10 million to Kauai.

The remaining $70 million each year would be put toward raising the standard deduction and providing the food and excise tax credits, which amount to about $50 per taxpayer, "as a way to offset the regressiveness of the excise tax," Taniguchi said. He offered no details.

Future Legislatures would determine whether to keep the rate at 5 percent after 10 years.

The Ways and Means Committee approved the proposal 12-3, with opposition from the panel's three Republican senators, Fred Hemmings, Sam Slom and Gordon Trimble.

"Coupling a huge tax increase of this nature with tax relief is, in fact, a huge tax increase no matter which way you slice it," said Hemmings (R, Lanikai-Waimanalo).

The proposal must be approved by the full Senate before being sent to the House.