The Change: Ongoing GE Tax Diversion to Rail
Hawaii's state government has consistently allocated General Excise Tax (GET) revenues to fund the Honolulu rail project, an ongoing financial commitment that significantly reduces potential funding available for other state services and business initiatives. While specific new legislation authorizing this particular $89 million transfer might not be immediately apparent, it represents the continuation of a long-standing policy. Since January 2018, approximately $23.5 million of GET revenue collected on behalf of the rail project has been withheld from general funds, indicating a systemic shift in budget priorities. This practice is expected to continue as the rail project progresses, creating a predictable, albeit often understated, drain on general revenue.
Who's Affected
While no immediate crisis for most businesses is triggered by this ongoing financial maneuver, the consistent diversion of GET revenue has subtle, long-term implications for a wide range of stakeholders:
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Small Business Operators: These businesses, while not directly paying for the rail, could indirectly face reduced state support over time. Historically, GET revenues fund a broad spectrum of state services, including grants, loans, and infrastructure improvements that benefit local businesses. A sustained diversion to a single large project like the rail means less available funding for these broader economic development initiatives. For instance, if a significant portion of the GET that might have supported a statewide small business incubator program is instead earmarked for rail debt servicing, such programs could see reduced funding or slower expansion.
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Real Estate Owners: While direct impacts on property taxes or development permits are unlikely, the long-term health of state infrastructure and public services can affect property values and desirability. If GET revenues are continuously diverted, it could lead to a slower pace of investment in non-rail public infrastructure (roads, utilities beyond rail needs, parks) that supports real estate development and property values.
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Investors: Investors in Hawaii should be aware that a substantial portion of state tax revenue is dedicated to a long-term infrastructure project. This could signal a reduced capacity for the state to invest in or incentivize other emerging sectors or innovative projects that might appeal to venture capital or angel investment. The focus on a single, large-scale transit project may also influence perceptions of fiscal flexibility for diversified economic development.
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Tourism Operators: While tourism is a primary driver of GET revenue, the allocation of these funds away from other potential uses could indirectly impact the tourism sector. For example, if GET is heavily committed to rail, funding for marketing Hawaii as a destination, maintaining high-quality public amenities, or investing in airport infrastructure (beyond rail's direct scope) might be constrained.
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Entrepreneurs & Startups: Startups often rely on a mix of private investment and, at times, state-backed grants, low-interest loans, or incubator programs. A constrained state budget, due to funding allocations like the rail, could mean fewer resources are available for these vital support mechanisms.
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Agriculture & Food Producers: These sectors benefit from state investments in agricultural research, land management, infrastructure (like irrigation or export facilities), and potentially subsidies or grants. A continuous diversion of GET may limit the state's ability to fund these areas, potentially increasing operational costs or slowing innovation for local producers.
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Healthcare Providers: Public health initiatives, state-funded clinics, and healthcare infrastructure projects are often supported by general state revenues. Reductions in the available general fund due to rail financing could impact the state's capacity to invest in public health programs or support healthcare facility upgrades.
Second-Order Effects
The consistent reallocation of GET revenue to the rail project, even if seemingly a minor percentage of total state revenue in any given year, creates a slow erosion of funds available for a multiplicity of other public goods and services. This can lead to a cascading effect:
- Diverted GET Revenue → Reduced State Funding for Public Services (e.g., road maintenance, park upkeep, education support) → Degraded Public Infrastructure and Amenities → Lowered Quality of Life and Business Environment → Increased Costs for Businesses to Compensate for Public Service Gaps (e.g., private security where public services decline) → Potentially Reduced Competitiveness for Hawaii Businesses.
Furthermore, a significant portion of GET is typically remitted by businesses as a pass-through tax. While businesses collect it, their ability to benefit from broader state investments funded by this tax is paramount. A sustained diversion means that the very engine of GET collection (the business community) may see diminishing returns on their tax contributions in terms of public services that support their operations and growth.
What to Do
This ongoing financial reallocation does not necessitate immediate tactical changes for most businesses. However, it demands a strategic awareness of state budget priorities and potential ripple effects on public services and future business support. The primary action is to WATCH signals of declining public investment and to be prepared for a future where less state support is available.
Action Details: Monitor the State of Hawaii's annual budget proposals closely for any indication of reduced allocations to general business development programs, infrastructure maintenance (outside of rail), or public services. Pay attention to reports from the Department of Transportation regarding road maintenance backlogs, the Department of Land and Natural Resources regarding park funding, and any announcements from the Department of Business, Economic Development & Tourism (DBEDT) regarding grant or loan program availability. If these indicators show consistent strain or reduction, businesses may need to proactively seek private financing, explore inter-island collaboration, or budget for higher costs associated with maintaining their own operational environments.
