LOS ANGELES - The Honolulu City Council on Wednesday voted 5 to 4 against an excise tax increase that would have served as an important source of local funding for a proposed $1.7 billion rail transit system.

The proposed 1-year increase, from 4% to 5%, would have helped fund the local share of the 17-mile transit project.

Mayor Frank Fasio called Wednesday's special session of the council to try to revive the excise tax increase. All nine met last week as members of the counsil's policy and environment committee and rejected the tax increase by the same vote.

The excise tax "as a financing vehicle, that's gone," Russell Miyake, Honolulu's finance director, said yesterday. Honolulu was required to implement the excise tax increase by Oct. 1 or lose state authority to do so.

Wednesday's vote was on the excise tax, but some market observers said they fear the defeat could deal a serious blow to the overall project.

"I can't give you the status on that," Mr. Miyake said, referring to the overall project. He added, however, that project supporters likely will explore funding alternatives.

Honolulu also aspects federal funding if the project proceeds.

Honolulu had hoped to use the excise tax increase to secure future debt sales for the project. Mr. Miyake said, adding the Honolulu tentatively had planned a $200 million bond sales in November if the tax increase received a green light.

Wednesday's vote did not come as a surprise. The five council members who opposed the tax increase indicated they would not change their minds after the committee vote last week.

The proposed light-rail transit system generated intensely divided opinion. Opponents of the system raise questions about cost estimates and ridership projections, and some businesses objected to the excise tax increase.

Supporters of the rail transit plan touted the system as a solution to worsening traffit congestion in the area.

The close vote stung government and business officials who backed the project, especially because they invested a large amount of time in shepherding the project over various hurdles. - indicating that issuers to the market.

Since then, however, the indexes have been moving up and down, tending toward higher levels. Meanwhile, actual sales have averaged $4.18 billion, but anticipated sales have averaged an even higher $5.19 billion.

In the short-term sector, The Bond Buyer's one-year note index dropped 25 basis points, to a record low of 2.8%, from last week's 3.12%.

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