Has Honolulu transit tax gone off the rail?

Oahu Rail Transit System

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Most of Honolulu’s multibillion-dollar rail project will be paid for by a half-percent surcharge on top of general excise tax for goods and services on Oahu. But is that money going where it’s supposed to, and are all businesses even complying with the payments in the first place?

Everything you’ve bought for use on Oahu over the past six years has had that extra half-percent tacked on to help pay for Honolulu’s rail. But sometimes when general excise tax goes up, rail’s share goes down, or vice versa, and it hasn’t found a level yet. We investigated why, and found many problems.

When tax collections started perking way up in the last half of last year, rail’s share wasn’t following suit, and that got the attention of HART, the Honolulu Authority for Rapid Transportation.

“We’re still scratching our head,” HART CEO Dan Grabauskas told KHON2. “And that’s why we sent the letter most recently to the Department of Taxation with some specific questions. We’ve asked them to make an accounting to us.”

We did some accounting of our own, not just for those 6 months that triggered the questions, but for the more than 70 months the tax has been around. We uncovered: a rollercoaster ride of ups and downs barely ever in sync — general excise tax might be soaring while rail’s share is sinking, or GE tax tanking and rail’s cut taking off. We ran it by experts for a thorough review.

“The kind of swings we see in the statistics, as you’ve figured it out, just don’t have any explanation,” said Lowell Kalapa of the Tax Foundation of Hawaii. “How come this number’s going this way and this number’s going this way when they should have been tracking basically each other?”

The Tax Department stands by their figures and says they’re giving the city the right share: “After being notified of concerns regarding the accuracy of county surcharge payments,” Tax told KHON2 in a statement, “the Department devoted many staff hours to conduct a review of approximately 75 months of surcharge allocation and payment data. The review showed that apparent variances in the county surcharge are the result of processing and timing issues.”

The Tax Department gave us charts that show things in sync when they correct behind the scenes for processing lag; we and HART cannot access the data they utilized for these shifts.

This session, Tax testified to the Legislature that: “The loss of experienced DP Branch staff and temporary tax season employees during the summer of 2012 resulted in a lag in the processing of tax returns during the July to

December 2012 period (from a one month pace to a two to four month pace)… Delays in processing tax returns resulted in delays in the posting of the surcharge collection amounts.

“Even if the money is being collected as they say,” Grabauskas said, “the times it’s being paid out to us is of critical importance. We have cash-flow needs. In other words, I have to pay out a lot of money once we get back to construction.”

“Both the Department and the City and County would like more timely and detailed reports, and that is why the Department is grateful that the Legislature has agreed to fund the development of its new Tax System Modernization project. The reporting capabilities of the current computer system are not as robust as we would like it to be. That doesn’t mean, however, that the numbers are unreliable or inaccurate.”

Swings in monthly numbers and quarterly payments to the city aside, experts say Tax’s own public data on tax collections and distribution should show a consistent level at least on a yearly basis, and they’re not.

For instance, overall in 2008, GE tax slumped, while rail’s take steamed ahead compared to the surcharge rollout year. In 2009 — the depths of the recession — they both dipped, but not nearly the same rate. In 2010 GE is up, rail’s share is down. They grow, but at vastly different rates, the next year. And last year 2012, GE collections = boom, rail money = bust.

Every 1 percent difference in the rail tax vs. the main pot means a $20 million swing in the city’s share, up or down. HART figures they’re nearly $30 million off pace. Some say it could be worse.

“They’re probably off, I would guess over five years, $100 million short to the city,” Kalapa said. “Until somebody goes in and does an audit and actually looks at the returns, it could be $100 million, it could be $10 million.”

He’s not alone in calling for that fix.

“I think this merits some investigation,” said House Finance Chairwoman Rep. Sylvia Luke, “clearly maybe an audit, or questions on the collection. An official audit clearly cannot be done off-session, but clearly departments are bound to answer a lot of the questions that various legislators and community have, so it’s something we’ll be looking at.”

Audit is not only on state lawmakers’ radars, but the Honolulu City Council, too.

“Something’s wrong somewhere,” said council Budget Chairwoman Ann Kobayashi, “and this whole project, I’ve been leary about the money part. I think they both need to have some kind of Accounting 101 to make sure about the taxpayers’ money, then they won’t have to come to the city to float bonds for them, which is borrowing money.”

Lawmakers are questioning not just rail’s share but the 10% the state takes off the top as an administration fee — more than $100 million so far out of the more than $1 billion they’ve taken in on rail’s behalf.

“Maybe the program and the process should be audited to determine what the actual percentage is, and what is that fair amount?” said Rep. Ryan Yamane, chair of the House Transportation Committee. “Is it 10 percent, is it 5 percent, is it 3 percent?”

Honolulu Mayor Kirk Caldwell and some state lawmakers took a stab at that last session, with bills related to audits and surcharge revisions. Tax had to come in and testify.

“At the time they said they could not give us accurate numbers regarding what the total collections are and what would be a fair amount for the cost to do the rail project,” Yamane said. “We are aware DOTAX is being monitored both federally and locally for accounting principles, and if there’s any violations that’s huge. When we talk to our various departments, and they’re unable to give us specific figures, it’s always a red flag.”

And we found another red flag: Not all who are supposed to pay the surcharge do.

In an unscientific survey of dozens of small businesses, we asked them if they fill out and pay the Oahu Surcharge on their GE tax filings. A remarkable two out of every five — 40 percent — confessed they’ve messed up.

When we told the Tax Department, their reply was this: “The Department has made significant efforts since it was implemented to educate general excise tax filers.”

They say efforts include “mass mailings prior to its implementation, notifying filers of common errors after implementation had begun, and increasing our customer service staff to be able to answer questions.” They revised instructions, sent out press releases, announcements, workshops, briefings, and web postings.

So how can so many still be missing the tax payment?

“Every year there is an average of 30,000 new applicants for general excise licenses and an average of 30,000 general excise license cancellations,” the Tax Department said. “Hawaii general excise filing population remains at approximately 675,000.”

Compliance early on in the program appears to have caused an especially big gap, perhaps as much as $50 million. The first 5 months of 2007 once the surcharge kicked off in January brought in around $30 million for rail — the next 5 months brought in $80 million. Asked if Tax ever went back to taxpayers to catch up on what they may have forgotten to report in early 2007, Tax told KHON2: “Our tax structure is based on voluntary compliance, and enforcement is through the auditing process. There hasn’t been any indication that the last Administration found any widespread problems.”

“They are missing some big dollars,” Kapala said, “If you can find people who are noncompliant after six years, they didn’t do a very good job of educating the taxpayer they had to comply with this new surcharge. There are such large taxpayers who definitely fear an audit of their books, they’re going to comply, so they’re going to kind of cover up or mask the fact there are a lot of noncompliant taxpayers, albeit they’re small businesses.”

Honolulu’s mayor told KHON2 it appears the state has not done enough education to ensure better compliance, and says the city could do better reaching out — and perhaps even collecting the tax — for less than they’re paying the state off the top, though he’d like to try to see the city and state resolve these concerns before exploring that drastic of a change.

“I’m going to be going back to the legislature next session,” Mayor Kirk Caldwell says, when KHON2 asks what he’s going to do to straighten things out. “We’re trying to get them to support an audit concept, and also the issue if they’re going to continue to collect the tax, we get a greater share. But in the interim, for the amount of tax they’re withholding, an audit, even if it’s hundreds of thousands of dollars, is something they have the money to pay for, and it would answer the questions you’re asking.”

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