WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers Weekly Commentary For the Week of March 26, 2017 Yes, Toto, Tourists Also Pay Real Property Tax By Tom Yamachika, President On March 8, the Hawaii Department of Business, Economic Development, and Tourism released a study on Hawaii real property taxes. It may be unusual for a State agency to do a study on a county tax. But this study appeared to be an outgrowth of a move by our teachers’ union during the 2016 legislative session, which we wrote about last year, to establish that our real property tax is too low. (Once that was established, the obvious strategy was to seek a surcharge on that tax to fund education, which we have written about in our last two weekly commentaries here and here.) The bill that we talked about then didn’t pass, but its substance was incorporated into the state budget bill, obligating DBEDT to do the study. One of the study’s key findings: “Nearly one third (32.3 percent) of the property taxes were contributed by property owners residing out-of-state.” To us, the fact that some of our real property tax is being exported is not news. Honolulu’s “Residential A” property classification, for example, was designed to squeeze more dollars out of land owners who had residential properties they didn’t live in. The idea was that most of these absentee owners lived out of state and maybe out of the country, so they could help foot the bill for those of us who actually live here. In addition, residential property is not the only property in town; all counties have different, and more expensive, property classifications for commercial, hotel/resort, and perhaps timesharing uses. A good amount of tax in those classifications is paid by nonresidents. Rather, the news is the extent to which the tax is exported – nearly a third. This number blows a large hole in the City & County of Honolulu’s principal argument in the rail debate. The City administration had been arguing forcefully that the best solution to fund rail is the GET surcharge, and so that the surcharge should be extended forever. Why was it the best solution? About a third of the GET is exported, they said, and if the surcharge is not extended the fiscal shortfall would need to be made up by other county funding sources, the largest of which by far is the real property tax. But the real property tax falls almost exclusively on our residents, the argument goes, so it would be hurting all of us a lot more. Mayor Caldwell’s State of the City address in February 2015, for example, included: “Why would I as mayor want to give the visitors a break and make all of us pay everything? Let’s make the visitors pay one third.” If a third of the GET is exported, as the City claims, and a third of the property tax is exported, as the DBEDT study indicates, then the argument doesn’t hold water. Moreover, the extent to which the GET is exported is a matter of debate. The Hawaii Free Press, using a City Auditor report, concluded that 14.1% of the GET is exported. The Foundation came up with its own estimates using calculations from Hawaii Tourism Authority and Department of Taxation data for 2011-2013, and found that the proportion of the surcharge attributable to visitor spending was 15%-20%. If those numbers are closer to the truth, then the City administration has it backwards, and we might be able to export more tax using the real property tax than by using the GET. But then again, if we rely more heavily on the real property tax to fund transportation, then what is going to happen to the real property tax surcharge to fund education? Clearly, this debate may lead to some cascading effects. We do hope that our policy makers will take the time to consider these matters fully before deciding to amplify the burdens on an already beleaguered populace. To view the archives of the Tax Foundation of Hawaii's commentary click here.
WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers Weekly Commentary For the Week of March 12, 2017 A Constitutional Amendment for Education Wars By Tom Yamachika, President A bill in the legislature, championed by the state teachers' union, would propose a new way of raising additional money for education. It would authorize a substantial surcharge on real property to fund education. The bill would require an amendment to the Hawaii Constitution to be effective. That is because our constitution now gives all revenue from real property tax to the counties. One thing that was not so obvious, however, is that the same bill proposed another change in the constitution that has not been discussed in detail yet. It’s easy to miss, but has a potentially far-reaching effect. By itself, the proposed amendment doesn't sound like much. Article X, section 1 of our constitution now begins with, "The State shall provide for the establishment, support and control of a statewide system of public education". The bill, SB 683, would change it to, "The State shall make sufficient sums available for the establishment, support and control of a statewide system of quality public education". The "shall make sufficient sums available" language is used in one more place in our constitution. It's in Article XII, Section 1, relating to the Department of Hawaiian Home Lands. Our supreme court, in Nelson v. Department of Hawaiian Home Lands, 127 Haw. 185, 277 P.3d 279 (2012), held that the language is “mandatory funding language,” which means that if the state legislature decides for whatever reason not to “sufficiently” fund DHHL, DHHL has a right to ask the courts to force the State to pay “sufficient sums,” if there is enough information within the history of the constitutional provision to give the courts a good idea of what “sufficient sums” means. In other words, the “sufficient sums” language is a ticket to an education war. The Legislature comes up with its judgment of what is sufficient funding for education; the Department of Education, HSTA, or whoever is affected disagrees; and they would battle it out in court. Would there ever be an education war? Suppose for a second that the constitutional amendment goes to the voters, the voters approve it, and the surcharges go into effect. Let’s say, for purposes of argument, that the surcharges bring in $500 million. (The current version of the implementing legislation bill would bring in less, but if the constitutional amendment passes, there is nothing to stop the implementing legislation from being amended. Yes, we could be opening our checkbooks wide!) At that point, everyone in state government outside of the Department of Education is going to be leaning on the Legislature to say, “Hey! You folks appropriated $2 billion to the Department of Education last year. They pulled down $500 million from the surcharges this year. How about dropping their appropriation to $1.5 billion this year? They will get the same amount of money, so they won’t be hurt. And our program/service/rebate/tax incentive could really use the extra help this year, and would make such a difference to the people of Hawaii!” Those within education, however, are likely to want the surcharge money on top of the $2 billion already going to the DOE. Otherwise, why the tremendous effort to get the constitutional amendment passed? Variations on the education war theme could also come up. Some could argue that our constitution requires bills to have titles that gives the public a fair idea of what is in them. The title of SB 683 talks about establishing tax surcharges, but does not give a clue that it is now mandating funding unlike the rules for every state agency outside of DHHL. So, if it is passed, its validity can be attacked. The education wars could get complex and nasty. As of this writing, the Senate Ways and Means Committee took out the “sufficient sums” language. The bill now goes to the House. Proponents of the bill may push to get the language back in. Will we see education wars in years to come? To view the archives of the Tax Foundation of Hawaii's commentary click here.
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