The state of Hawai'i stands to collect an approximately $40 million windfall over three years thanks to a new tax intended to pay for Honolulu's transit system.

The state added a half-percentage-point surcharge to the excise tax for O'ahu residents beginning in January 2007 to pay for the city's planned $3.7 billion commuter rail system.

The state collects the tax, takes a 10 percent cut for administrative costs and gives the rest to the city. The administrative costs, however, are proving to be much lower than the 10 percent, according to the state Department of Taxation, and the excess is going into the state's general fund.

The tax surcharge is to be collected until 2022, and based on current estimates, the state would get $300 million for administrative costs during the life of the levy.

"It's a windfall," said Sen. Sam Slom, R-8th (Kahala, Hawai'i Kai), who's on the Economic Development and Taxation Committee. "I don't think the state should have it." The excess transit tax collections should go back to taxpayers, Slom said.

Mayor Mufi Hannemann said the excess should go to the city and county.

"The Legislature is well aware of the city's position on the state share," Hannemann said in an e-mail reply. "Once the state figures out its administrative costs, we believe the difference should come to the county."

The tax surcharge raised $163.1 million in its first 13 months. By law, the state kept about $16 million to cover administrative costs. However, the state's actual administrative costs amounted to about $6 million last year, according to the state Department of Taxation.

The cost of administering the tax was highest in the first year, when the state was putting in place a system to collect it. Now that the tax is in place, administrative costs are projected to drop to $944,312 in the current fiscal year, ending June 30, and $717,944 in fiscal 2009. That excludes $233,300 for annual hardware and software upgrades requested starting in fiscal 2009.

COSTS UNCERTAIN

The administrative costs for collecting the surcharge are budgeted at about $7.9 million during the first three years of the tax. During that period, the state's portion of the tax revenue is expected to be $48 million, or about $16 million a year.

State tax director Kurt Kawafuchi said the administrative costs may be more than what has been reported because there are costs that can't be easily calculated. For example, some ongoing labor costs associated with collecting the transit tax are difficult to break out, he said. In addition, the state lost the opportunity to generate more tax revenues because of a need to focus on transit tax issues, Kawafuchi said.

"We had to sacrifice a lot of other projects that would be generating more general-fund revenues to work on this," Kawafuchi said. "We had to take our best resource, our top people, to get it up and running.

"But those (costs) are hard to quantify," Kawafuchi said.

Hannemann hopes to break ground on the elevated rail line late next year, with the first segment starting service between East Kapolei and Leeward Community College in 2012. The city plans to extend the rail line to Ala Moana Center by 2017.

Honolulu taxpayers are expected to bear about $3 billion of the project's $3.7 billion cost through the tax surcharge.

FAIRNESS QUESTIONED

For the state to keep more tax revenue than needed to cover expenses is unfair, said City Councilman Todd Apo.

"It's fair for the state to keep what their cost is for doing that, but it shouldn't be any more than that," said Apo. "It was intended for them to cover their costs, not for them to gain additional general-fund revenues out of this. If it was, there should be a public discussion of (whether) you want to use additional general excise tax surcharge for state general- fund operations."

Slom said state lawmakers are unlikely to reduce their cut of the transit tax anytime soon. The state's economic growth is slowing, which is likely to lead to lower tax revenue growth and a reluctance on the part of lawmakers to give up revenue.

"They're not predetermined to give that money back," Slom said. "That money is gone."