A Honolulu Circuit Court judge has rejected a lawsuit filed last year to stop the state from skimming 10 percent of an excise tax surcharge to use for its own purposes.
The half-percent surcharge was approved by state lawmakers in 2005 to fund the bulk of the city’s $6.57 billion rail project, but the Legislature added a provision allowing the state to deposit 10 percent of those tax collections into the state’s general treasury.
The surcharge generated $248.5 million in the fiscal year ending June 30, 2015, and about $25 million of that was deposited in the state’s general fund. The rest of the money was earmarked for the city’s rail project.
The state’s 10 percent share of the tax is supposed to cover the state’s cost of collecting the tax for the city. However, the total budget for the entire state Tax Department in 2015 was $28.2 million, and critics complain the state is taking an unreasonably large share of the surcharge revenues.
The Tax Foundation of Hawaii last year sued over the practice, alleging that because the state takes far more revenue than it needs to administer the excise surcharge, “the bulk of the
10 percent retained by the state is an illegal and discriminatory additional general excise tax on those who are now required to pay the county surcharge.”
The lawsuit alleged the
10 percent deduction by the state violated the state and federal constitutions, but Circuit Judge Edwin C. Nacino disagreed. On Wednesday Nacino dismissed the case, ruling the courts are not permitted under Hawaii law to issue declaratory judgments “in any controversy with respect to taxes.”
Deputy Attorney General Hugh Jones said in a statement that the court “recognized the proper way to address this dispute is not through the court system, but through the legislative process.”
The Tax Foundation also issued a statement Thursday, pledging that “the legal battle is not over.”
“Judge Nacino’s ruling doesn’t say that no problem exists, but just says that his court isn’t the one that can fix it,” said Tom Yamachika, president of the Tax Foundation of Hawaii. “We are currently considering our options with our legal counsel, but we want to let the taxpayers of the state of Hawaii know that our fight on their behalf will continue.”
The state diversions of excise tax surcharge money now total more than
$150 million, funds that are “sorely needed for rail construction,” according to the foundation.
