Neighbor islands
will feel tax hit

Honolulu business expenses will
carry out to other islands

Neighbor island businesses and residents might think they won't feel the sting of a 0.5 percent general excise tax surcharge passed by the Honolulu City Council.

Think again.

"I don't think they know how much it's going to burden and impact them," said state Tax Director Kurt Kawafuchi.

Tax Foundation of Hawaii President Lowell Kalapa added, "It's an Oahu-imposed tax, but the impact will be far-reaching."

Next week, Mayor Mufi Hannemann is expected to sign Bill 40, which imposes a general excise tax surcharge on Oahu, raising the tax to 4.5 percent.

The additional tax revenue, estimated at $150 million, is targeted to pay for mass transit, probably a rail system. The tax will start Jan. 1, 2007, and last for 15 years.

But while Honolulu will likely be the only county to enact the tax, the neighbor islands will also feel the increase.

That is because, tax experts say, the majority of goods and services in the state make their way through Honolulu.

And even if a business or resident never leaves a neighbor island, yet buys items from or uses a service based on Oahu, they will end up paying the extra 0.5 percentage point.

"For instance, a neighbor island store which hires the Honolulu architect will be paying a half-percent more," said Russel Yamashita, an attorney who is also the legislative committee co-chairman of the Hawaii Association of Public Accountants.

Yamashita's group testified against Bill 40, pointing out the "detrimental" impact it would have on the neighbor islands.

"The assumption was made that the neighbor islands would not be affected by the imposition of this because their respective counties would not imposing the tax," Yamashita wrote in his testimony. But the assumption was wrong, he said.

"In our members' discussions with their clients, they're coming to the realization that they are going to be continuing business with Oahu companies one way or another. The half-percent is definitely going to be tacked onto the direct services," Yamashita said.

Yamashita also said that having two different excise tax rates in the state could be tricky to administer.

One example cited was an attorney based on a neighbor island with a neighbor island client but litigating a court case for that client in Honolulu -- the work done on Oahu would likely be subject to the additional half-percent.

"It becomes an accounting nightmare for people," Yamashita said.

Kawafuchi noted, "You could make life real complicated for that attorney."

He said these kinds of issues are on the table when his department sits down to work out the logistics of the city taking over the collection of the county surcharge. "We are planning to push along," he said.

Hannemann said that most of the state's tax base and population are on Oahu, and the neighbor islands have benefited from state and federal tax revenues as a whole.

"For those who say, 'Hey, we're paying for a tax that's going to just benefit Oahu,' that's not necessarily true," Hannemann said.

In responding to criticism from those living in East Honolulu and Windward Oahu where a rail line probably will not run, Hannemann has said that those areas have had major transportation improvements paid for by taxes paid by residents from other parts of the island and those improvements have helped traffic.

The same argument can be made for the neighbor islands, he said.

"I think once again you have to look at the whole ohana concept," he said. "We need to look at how it benefits the whole state. What everyone is going to also realize is that when the transit system is put into place, the increased revenues that come into the state around those transit stations are going to benefit all of us."