Deal could privatize collection of taxes

Some officials are worried about the burden the agreement might put on the city

The basic government function of collecting taxes could go private under a proposed state and city agreement on general excise taxes.

"This is harebrained," said Randy Perreira, deputy executive director of the Hawaii Government Employees Association. "It's inappropriate to be farming that out to the private sector."

But the union is not the only one concerned about the proposed arrangement.

The City Council's Budget Committee deferred action yesterday on a memorandum of agreement that would allow the city and state to contract with a third party to collect both the state's 4 percent general excise tax and the newly enacted 0.5 percent surcharge for mass transit, which will be levied beginning next Jan. 1.

Budget Committee Chairwoman Ann Kobayashi said she is worried that the city will be saddled with a responsibility that the state is set up to do. "I don't think the city should collect the tax."

Councilman Romy Cachola, also a member of the committee, said during and after the meeting that he is worried the process to get rail transit on Oahu could also be derailed because of union grievances.

"Towards the end, people may lose jobs or they might be doing differently than what they're doing now, and all that is part of collective bargaining," Cachola said. "And you've got to know the implications."

Cachola said he believes a solution can be worked out without the need for a third party.

Gov. Linda Lingle threatened to veto legislation last year that proposed giving the counties the authority to impose the 0.5 percent surcharge on the GET to fund transportation projects.

Lingle objected because the legislation named the state as being responsible for administering and collecting the new tax. She said the responsibility should be the counties' job.

But last-minute negotiations between the Governor's Office, Mayor Mufi Hannemann and legislative leaders led to Lingle allowing the measure to become law without her signature, if the legislative leaders promised to introduce measures this session that would change the tax-collection duties from the state to the counties.

Since then, city and state tax officials have been meeting to hammer out an arrangement.

First Deputy Corporation Counsel Donna Woo told the committee that the memorandum was prepared in anticipation of the city gaining the tax collection duties and setting up the new tax collection system.

"We need the information from the state because the state has the database of all the taxpayers -- we don't," Woo said. "The thing we want to maintain is that taxpayers who are paying the surcharge receive as minimal of a disruption in the tax payment. So it's anticipated that one bill go out and they write one check to one entity."

Woo said that in order to do that, the state and city must cooperate in the collection.

She said the Legislature must first approve empowering the city to handle the tax, but if it does not approve the change, the agreement would not be needed.

Woo said that at this point both the state and city are ready to talk to "third parties" to help set up the new tax collection system.

"In order for us to collect the money, we do have to change the state system, and it just takes time to contract to get the workers in there. And whichever way we go, that's going to have to happen," city Budget Director Mary Pat Waterhouse told the committee.

Perreira said the agreement would set a bad precedent.

"I don't think there's any disagreement that taxation and the collection of those taxes should remain a function of the government," he said. "We entrust the collection of public funds to the government. That is not the kind of function that we should be entrusting to a third party."

He said that other taxing functions could be subject to privatization. "There is nothing sacred left in government."

Perreira said the union will oppose the agreement and any legislation that would lead to such an agreement being implemented. "Absolutely," he said.

After the meeting, Waterhouse said she does not know what, if any, impact the deferral will have on the ongoing discussions between the state and city.

"We need to get back to the Tax Department," Waterhouse said.

State Tax Director Kurt Kawafuchi could not be reached for comment.