 Competition for People
Over the past 10 or so years that I have been in the seat, I have seen legislature after legislature consider many, many bills to increase taxes. Every year. Without fail. At the Foundation, we keep a list of the tax bills that are introduced and that get at least one hearing. The list is usually six or seven pages long. During the legislative process, most of these are weeded out, like most other bills, but there still is a two- or three-page list of tax and public finance bills that is sent up to the governor. Income tax. General excise tax. Transient accommodations tax. Death tax. Conveyance tax. “Sin taxes” on fuel, liquor, cigarettes. The list goes on. And when it comes to the level of tax, Hawaii is up there. We are tied for the top estate tax rate. We have the second highest income tax rate (and we would’ve beaten California if one of this session’s bills became law). Our general excise tax is applied to far more things than any other comparable tax in any other state. When these facts are brought up to lawmakers, they don’t seem to care. Why? Probably because they don’t realize, or don’t want to realize, that Hawaii needs to be competitive. For people. Hawaii used to be an island kingdom, a world unto itself. That is no longer true. We are part of a much bigger country, and that country is a part of a much bigger world. Throughout the years, improved forms of transportation and technology have been obliterating the barriers between one state and the next, or one country and the next. Our government, like most in this world, relies upon tax revenue to stay afloat. Those taxes aren’t paid by government, they’re paid by people. If you don’t have the people, you don’t have the tax. This COVID-19 emergency showed us what that meant in no uncertain terms. We recently wrote about an economic study that showed that people, specifically the rich people who pay most of our taxes, had their limits. If taxes went too high, people would pack up and leave, taking with them money they would otherwise have spent on sales and income taxes. This is not a possible problem. It’s a current problem. As we wrote in an earlier article, we are losing people now and we have been losing people for some time. Even the University of Hawaii Economic Research Organization (UHERO) recently told our lawmakers that “our models are generating big outflows of population bigger than we have seen, certainly in my lifetime.” What does that mean? People who are packing up and moving out are moving to somewhere else, because that somewhere else looks better to those people. We can’t delude ourselves into thinking that people who are born here or live here will love our islands so much that they’ll never leave. Instead, we need to see ourselves as competing with other states or countries. For people. Certainly, states don’t compete for people simply on economic terms like tax rates. We do have a relatively clean and healthy place to live, and that is worth something. But it’s folly to assume that everyone who is “lucky to live Hawaii” will be able to pay the price of paradise, especially if that price keeps going up without corresponding improvement in the quality of services that our government offers its residents. Overall, our lawmakers absolutely need to realize that, whether we like it or not, we are competing for people. We need to plan our government functions and services, and how our residents and visitors pay for them, with that in mind. The status quo, with our people packing up and leaving, is telling us we are losing the competition and we need to do better to survive.
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 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.  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. |
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