The City Council will hold a special meeting Thursday to try to clear the latest roadblock to a new transit system for Ho-nolulu — a dispute over how to collect a tax increase to finance the system.

Yesterday, Council Chairman Donovan Dela Cruz confirmed that he has received a copy of a letter written on behalf of Gov. Linda Lingle and signed by state attorney general and acting Gov. Mark Bennett proposing that the collection could begin with the city fronting the money and the state later reimbursing it.

The state law allowing the tax surcharge said the state is authorized to withhold 10 percent of the total collected to administer the extra collection but the Legislature earlier failed to appropriate any money to pay for collection, which raises questions about how it could begin.

"We would agree to propose to the Legislature and vigorously support an emergency appropriation bill that would pay to the city and county, out of the 10 percent, both the $5 million and appropriate interest," Bennett wrote.

"Everyone wants to be part of the solution," Dela Cruz said. "I'm very optimistic."

The governor and Mayor Mufi Hannemann had clashed over who should have been responsible for having the Legislature earmark money to pay for the collection of the excise tax surcharge for the transit system.

City Councilman Charles Djou, who had voted against the transit tax, yesterday said he's pleased the state and city are working on shaping a solution.

"It doesn't mean that I support the tax increase," Djou added.

Bennett's letter proposes that the city could pay $5 million to cover a contract with a private vendor to collect the additional tax on O'ahu.

The city is counting on the increase in the general excise tax on O'ahu — from 4 percent to 4.5 percent effective Jan. 1 — to provide about $150 million a year for a mass-transit system in Honolulu.

Though the state law authorizing the increase in the excise tax stipulated that it would be collected by the state, Lingle has said the Legislature failed to set aside money to pay a vendor to handle the extra work.

Dela Cruz said having a scheduled public meeting gives the council time to consider the matter and offer suggestions "or come up with something else."

Hannemann spokesman Bill Brennan said the city received the letter and a council resolution expressing support for a solution.

"Mayor Hannemann has been apprised and has asked staff to review them. He will personally review the proposals upon his return" from the Mainland, Brennan said.

Any hurdle to the project worries transit supporters, who have struggled for decades to win support for a transit system.

Reach Robbie Dingeman at rdingeman@honoluluadvertiser.com.