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TAXWatch: Finding the Magic Bullet, City’s Share of Rail Administrative Costs

Honolulu Rail Transit file image.

In a recent hearing in the Honolulu City Council’s Budget Committee, council leaders say that they might have found a “magic bullet” – one that they say will get the City’s share of rail funding done painlessly.

Here’s the issue.  The City needs to cover $44 million in administrative costs for rail for 2018 and 2019.  The City previously didn’t provide for them in its budget, on the ground that the project already had enough money to cover those costs, but the Federal Transit Administration didn’t like that, thinking that the City didn’t have enough of its own skin in the game.  Thus, the Mayor included that money in the City’s fiscal 2019 budget.

The City Council’s budget chair proposed to deal with it by putting it in the Honolulu Authority for Rapid Transportation’s capital budget.  That way, dollars from the Hawaii general excise tax surcharge, which are restricted in that they can pay for the capital cost of the project only, would be available to pay those charges.  So, the City wouldn’t need to endure the pain of paying them out of its own operational funds.

But wait.  Is that really a viable solution to this problem?

Normally, an operating budget pays for the ongoing operational costs of a business, including salaries, wages, office overhead, and other day-to-day costs.

A capital budget normally pays for the costs of building something and getting it into a state of readiness for its intended use.  If you are building something very large, for example, those costs may include buying the parts, paying for the labor to move those parts to their intended location and to assemble them, for example.  Those costs are incurred to build the asset and then stop when the asset is built and in use.

The general and administrative costs of HART – the salary of the executive director, for example – are not going to stop after the project is built, so it is hard to think of those as capital costs.

There is also the matter of state law.  Hawaii Revised Statutes section 248-2.7(c)(2), which was added in the special session of 2017, says that the monies in the mass transit special fund, which includes the GET surcharge as well as the extra percentage point of transient accommodations tax, can’t be used for: “Administrative, operating, marketing, or maintenance costs, including personnel costs, of a rapid transportation authority charged with the responsibility for constructing, operating, or maintaining the mass transit project.”

Merely putting the administrative costs of HART into its capital budget isn’t going to get around these requirements.  Unless the City Council budget chair has a secret weapon.

Maybe the Council can argue, “Guys, the GET surcharge is City money from the outset because we raised it through a City taxing ordinance, so you folks at the State don’t have the right to restrict our ability to spend it.”

Mayor Caldwell, in the meantime, issued a statement saying that he would support the plan if the FTA does.

Has the Council found the magic bullet?  Only time will tell.

Honolulu Rail Transit image.

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About Tom Yamachika

Tom Yamachika
Tom Yamachika is the President of the Tax Foundation of Hawaii, a private, nonprofit educational organization dedicated to informing the taxpaying public about the finances of our state and local governments in Hawaii. Tom is also a tax attorney in solo practice and has been since early 2013. Prior to 2013, he was with the accounting firm Accuity LLP, which was formed in 2006 from the Honolulu office of Coopers & Lybrand (which later became PricewaterhouseCoopers). Before that, he served as an Administrative Rules Specialist in the State of Hawaii Department of Taxation from 1994 to 1996, where he drafted rules, interpretive releases, and legislation on several different state taxes. Prior to that, he practiced litigation and tax law with Cades Schutte Fleming & Wright in Honolulu.

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