 Vacant Homes Tax?
Recently, the Honolulu City Council has taken up the idea of imposing a different tax rate for residences that are vacant. The idea is contained in Bill 76 (2020), a bill that started off last year, was referred to the Council Budget Committee, and was postponed by the committee in November 2020 after a couple of public hearings with only a couple of members of the public weighing in. Now, KHON2 is reporting that there is new momentum for the bill following some discussion by the city’s Real Property Tax Advisory Commission. “The idea is to get folks who have vacant homes to rent them out, or the sell them, hopefully to other local people,” Honolulu City Council chair Tommy Waters is quoted as saying. The concept of a vacant homes tax is not new. State lawmakers tried to attach the idea to the conveyance tax, but the bill to do that, SB 2216 (2020), passed the Senate but ran into a brick wall in the House. The devil, of course, is likely to be in the details. How does some bureaucrat sitting in the real property tax office have any idea whether a property is vacant? Maybe the official can pull down some data from the water or electric utilities and send a proposed assessment when the numbers are low. Maybe the official can take an idea from TV shows by sticking a business card in the front door and returning after a few days to see if the card is still there. And, once the tax office has concluded that the property was vacant and is subject to the new tax, how is a property owner who in fact lived in the property to prove that fact? Let’s listen to a conversation with a typical (?) property owner. Watch Doggie: I was living in that house. Tax Official: Prove it. W: I barked at the neighbors. T: Where’s your documentation of that? W: The neighbors called the police so there must be a police report. T: Do you have a copy of it? W: No… T: Pfft. What other “proof” do you have? W: Here’s my electric bill. Isn’t it high for a vacant property? T: So you forgot to turn off the fridge. Doesn’t show anything. Next! W: Here’s my state ID card listing my address. T: You got that ID six years ago. But even if you got it yesterday, it doesn’t show that you actually live there. Next! W: I have receipts from my neighborhood grocery store. T: But you still could have been living somewhere else. Next! W: Grrr! I’m going to bite you on the schnozz! T: You do that, you’ll be in the hoosegow, and there’ll be no doubt that you aren’t living in the property we’ve assessed! Another interesting problem is that the rates for the vacant home classification are subject to be determined. That’s nothing new because usually rates are set in the annual budget ordinance. But until then, we won’t know how high they are thinking of raising the rates. KHON2 reported that they were thinking about a tax between 1% and 7% … which translates into a bump from the current residential rate of $3.50 per $1000 of value to anywhere between $13.50 and $73.50 per $1000. Which translates to an increase of between a 286% and 2000% from the current rate. Yeow! This is an issue certainly worth watching in the months ahead.
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 Counties, You’re TAT Collectors Now
Most of us have heard about House Bill 862, the bill that cut off the counties’ share of Transient Accommodations Tax (TAT) but allowed the counties to impose their own TAT. This bill became law by legislative override of Governor Ige’s veto. To make things “easier” for taxpayers, the law says that the counties‘ TAT needs to cover the same things, and have the same exemptions, as the state TAT. But the law has no provision allowing the counties to piggyback on the State’s collections like the state GET surcharge. Which means that counties that want to impose the TAT not only have to pass their own ordinance, but also need to hire their own people to do their own collections. Kauai Council Chair Arryl Kaneshiro said that it seemed like such a waste of resources, “They [the state] assess [general excise] tax and they cut us a check for it. I see it as the same thing with TAT. For us to have the same system and pay two different sets of employees to do the same thing, I don’t see it as being anywhere near efficient.” The counties tried. According to reports, the counties tried to work out a memorandum of understanding with the State Department of Taxation to come up with a solution similar to what happens with the GET now. But the Attorney General put the kibosh on that idea, understandably pointing out that unlike the GET surcharge law, HB 862 makes no provision whatsoever for joint collection. The counties are on their own. This isn’t the first time the counties have been asked to administer on their own a tax that is mandated to follow state rules. For the first ten years after the counties took control of the real property tax following the 1978 Constitutional Convention, the counties administered the tax mostly according to state rules, as provided in the Hawaii Constitution. Also, after the counties sued for a piece of the Public Service Company Tax imposed on public utilities because it was imposed on the utilities instead of real property tax and GET, the resolution of the suit led to the enactment of Act 64 of 2001 allowing the counties to impose and collect their own PSC Tax. Those changes, however, did not cause the counties headaches. The transfer of real property tax was a change that the counties wanted and were ready for. For the PSC tax, most counties seemed to respond by foisting the new responsibility on their finance department staff, which wasn’t too problematic given that there wasn’t an inordinate number of public utilities. In contrast, the language in HB 862 that dumped the TAT revenue sharing was introduced for the first time by the Conference Committee, which neither heard the bill nor accepted any public testimony. A different bill with TAT surcharge language appeared late in the session. It was put into play when the Senate gut-and-replaced a House TAT bill with a very different focus and sent the revamped bill into conference. That bill (HB 321 SD1) contained language allowing the State to collect the tax on behalf of the counties. Even so, the Hawaii State Association of Counties and some of the individual counties testified against it. Imagine everyone’s surprise when the final version of HB 862 came out with a TAT surcharge that the State wouldn’t help the counties collect. When a new tax is enacted, there are usually a few devils in the details. This one presents the counties with pandemonium. Economists generally like the idea of having taxes levied by a local government that is closer to the local population and thus more responsive to the local services that are required, as UHERO points out. But this instance feels a lot more like sending the counties up the creek without a paddle. Fixes to allow greater efficiencies in administering this tax should be enacted soon if this surcharge is to continue.  Can Raising a Tax Lose Money?
One fundamental assumption that has been made over the years by our lawmakers is that if you enact a tax, money will be raised. What if that weren’t true? In late 2019, a pair of economists, Enrico Moretti and Daniel Wilson, published a paper titled “Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy.” In that paper, they followed the movement of 400 of the nation’s richest people (the “Forbes 400”) and came up with a mathematical model to predict the chances that a particular rich person would move out of state in response to either an enactment of or a hike in that state’s estate tax. Why concentrate on the wealthy? Only they are on the hook for the estate tax. Even in Hawai’i the estate tax doesn’t kick in unless the deceased person has amassed $5.49 million in wealth, so we are not talking about ordinary folks you see on the street. Then, they theorized, based on earlier research, that if one of these rich people moves, they will pay a lot less of the former home state’s other taxes, such as income tax and sales tax. In that way, the move will cost that state. They then tried to answer this question: “If X State adopts or increases an estate tax, will that state make money or lose money, and how much?” They tried to answer that question both with a targeted tax aimed at the ultra-wealthy (a so-called “billionaire’s tax”), and with a broader based estate tax. When they modeled the billionaire’s tax, they found that 48 states had an expected revenue gain. But two states could be expected to lose money: California and Hawai’i. “For Hawaii,” the study said, “cost-benefit ratio [of having a bigger estate tax would be] equal to 1.43. The expected present value of having an estate tax is ‑$73 million. The difference between Connecticut [which would benefit from an estate tax] and Hawaii is largely due to the difference in their personal income tax (PIT) rate. Hawaii’s PIT is higher than Connecticut’s. The higher PIT rate in Hawaii means a higher opportunity cost of foregoing billionaires’ income tax streams.” When they modeled the broader-based tax, assuming that the less ultrawealthy (people who had estates big enough to pay estate tax but who weren’t billionaires) were just as likely as the Fortune 400 to pack up and move in response to a tax hit, they found 42 states with an expected revenue gain. Eight states were expected to come up short. Of the states that don’t have an estate tax now, four were at risk: California, Idaho, Nebraska, and New Jersey. Of the states that do have an estate tax, four were at risk: Vermont, Oregon, Minnesota, and—you guessed it—Hawai’i. Although the study didn’t pin down exactly when a state would be at risk for losing money if adopting an estate tax, it observed that California, the state with the most revenue at risk, had the highest personal income top tax rate. Hawai’i has never been far behind on that metric. We were even seriously considering legislation last session (Senate Bill 56, Senate Draft 1) that would have pushed our top personal income tax rate way past California’s, and we earned national attention, perhaps national derision, for that bill. Over the years, this column, among others, has been accused of pandering to the wealthy and for being opposed to the “fundamental fairness“ that requires those with more to pay their fair share. We at the Foundation, however, are not trying to decide social policy. We’re trying to present the facts and the risks of unintended consequences. Our legislators are the ones making the hard policy choices. They should be making these choices with more information, not less. |
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