Taxing Government Benefits
  
We’re still well into the aftermath of the Maui and Hawaii County wildfires.  Our governments have opened up their coffers and have begun doling out lots of money toward disaster relief and emergency assistance.

Legitimate questions now need to be asked about whether the government is going to want to take back some of that money in taxes.  It’s an important issue for people in the midst of the disaster because if the money is taxable and a wildfire victim spends all of it on necessities like food and shelter, is that victim going to have major problems down the line because that person needed to set a bunch of that money aside for taxes and didn’t?

On August 30, 2023, the Internal Revenue Service released Notice 2023-56, a technical document (probably best appreciated by tax geeks and legal wonks) that is supposed to help people make sense out of the different kinds of government payments they may be receiving, and whether they are taxable.  The Service noted that it isn’t always easy to figure out whether a particular payment is subject to tax, and it basically decided to look the other way for 2022 payments; but, since they can’t do that forever, they decided to publish some rules.

Usually, if you receive money and you get to keep it, that money is income for tax purposes.  The Notice discusses three exceptions:  state tax refunds, “general welfare” payments, and disaster relief payments.

State tax refunds aren’t normally taxable, except that if you took an itemized deduction for a state tax payment and then get some or all of the payment back, you might have to walk back your deduction.  The Notice also said that some “refundable credits,” which are paid to you even if you didn’t owe tax, are not considered refunds and need to be analyzed like other payments from the government.

Some payments from the government are considered “general welfare” and aren’t taxed.  These payments have to be based on the need of the individual or family receiving the payments, and they can’t be a payment for services sold to the government.  Many of the refundable credits that Hawaii offers to lower-income families come under that description, so they aren’t taxable. On the other hand, payments to businesses are usually taxable, but there are exceptions; many of the COVID-19 relief programs, for example, included language in the law saying that benefits wouldn’t be taxable.  Businesses also need to be wary of General Excise Tax on payments related to the disaster.

There is also a specific section of the federal income tax law, section 139 of the Internal Revenue Code, that applies specifically to disasters that are declared by the federal government so that FEMA gets involved.  The criteria for tax exemption under this section are similar to those for general welfare payments.  The payments need to be made on the basis of need, and need is presumed if the payments are directed to disaster victims.

In any case, a government entity that is paying benefits needs to give you a Form 1099-G at the end of the year if the benefits are taxable.  Especially if the entity has been paying benefits to other people because of other tough circumstances, it probably has some idea of whether the benefits it is paying are taxable or not.  So it may be a good idea to direct specific questions to the paying entity.

Getting Kids to School in Kihei
 
Let’s start with a simple proposition.  Taxpayers pay our government to get things done.  Taxpayers don’t pay our government agencies to fight each other so that nothing gets done.

We focus this week on Kihei, Maui, where our Department of Education (DOE) has been trying to open a new, $245 million, high school primarily for Kihei.  It’s called Kulanihakoi High School.  It’s built, and has been built for some time, but it can’t open.

Why?  Lots of families live makai of Piilani Highway (which is a busy, four lane highway) around Kulanihakoi Street.  The school was built mauka of Piilani Highway.  To get to the school, kids now have to cross the highway.  Concerns about the safety of having kids compete with cars here prompted the State Land Use Commission to conclude, ten years ago, that a “grade-separated crossing,” like an overpass or an underpass, needed to be built.

Over the years, DOE appeared to go along with the requirement.  In early 2020, when it approached Maui County for permits, it said that the design of the pedestrian overpass was already started and projected for it to be built in 2022 and 2023. 

But in 2021, DOE did an about-face.  Instead, it went back to the Land Use Commission to ask it to change its previous order to allow it to open the school without a pedestrian crossing, citing studies (paid for by guess who) presumably showing that the pedestrian crossing was not needed.  This attracted objections and demonstrations from the public, and the Commission denied the DOE’s request.

At the same time, the DOE and the Department of Transportation spent $16 million on a four-lane roundabout with flashing lights in front of the school to slow traffic down and thereby eliminate (in DOE’s mind, perhaps) the need for an overpass.  County officials were skeptical and arranged a meeting in late August 2022 with council members and other community members.  No one from the DOE showed up to the meeting, however.

In February 2023, DOE seemed to accede to the overpass, presenting some rough sketches to the community.  The agency said it would ask the Legislature for emergency funding to build the overpass.  Sen. Angus McKelvey, who represents the area, said that he added $15 million for the project in the Senate’s draft of the plan, but that funding didn’t make it into the state budget.  It isn’t clear why the funding request was deleted; perhaps it was because that wouldn’t be enough.  The Governor’s Office issued a release saying that its construction would cost more than $25 million.

In March, Gov. Green announced that the state and county governments had reached a deal allowing the school to open in exchange for requiring the DOE to implement a temporary pedestrian safety plan, including shuttles for students walking to and from school, until the new pedestrian overpass is completed.  The school is now slated to open in August.

Let me now ask this question:  If the DOE had listened to the Land Use Commission ten years ago and had not put tons of resources into studies and legal briefs trying to get the Commission to change its mind, how many millions of taxpayer dollars could have been saved – by the DOE, the Department Transportation, Maui County government, and even the Governor’s Office?

Study the Empty Homes Tax Again?
 
One concept that has popped up again, more often than the little animals in a Whack-a-Mole game, is the prospect of an “Empty Homes Tax.”

Simply put, if someone owns property here but doesn’t live in it for, say, six months out of the year, then we charge that someone a hefty real property tax surcharge. Why?  Because that someone has removed a housing unit from circulation in a place where we really, really need housing units.  Just last year, for example, the Honolulu City Council was considering a bill (Bill 9 of 2022) that would have set the tax at 3% of the property value, per year.

Last year, when we wrote about this development, we pointed out that there would be lots of devils in the details.  How does one hope to enforce such a tax without running roughshod over people’s privacy (which is constitutionally protected in this State)?  Do we simply require everyone to file a form, every year, saying that “1234 Aloha Drive is my home, and I have lived in it for more than six months this year,” assume that the folks who haven’t sent the form in have vacant property, and then throw them to the wolves in the City’s tax collection agency?  How would we deal with the resulting flood of people who (1) never heard about the new law, form, or tax, (2) figured out that there was a tax and a form, but for whatever reason filed the form too late, or (3) had good reasons for not living in the house, such as being hospitalized for a substantial part of the year?

This year, the City & County of Honolulu is trying again.  They are on the path toward commissioning a study, projected to go out for bid in August, that seeks to determine “why so many homes are vacant, and how a vacant homes tax could benefit Honolulu’s many residents who lack suitable housing.  Benefits to be explored should include contributions to a housing fund, discouraging the ‘hoarding’ of empty properties and encouraging owners to rent these properties to Hawaii households.”  The Star-Advertiser appears to be on board with this idea, as it stated in an editorial on July 14th.  City officials say that the study will be paid for with federal pandemic relief money, so residents don’t have to worry about its cost.

First, am I the only one wondering what in the world a vacant homes tax has to do with the COVID-19 pandemic so as to justify funding this study with pandemic relief funds?  Second, what about the study done by the UCLA Luskin School of Public Affairs that the City had done in 2021?  Is this new study going to cover the same ground, and if it does, why are we taxpayers getting hit for another one?  So that two independent consultants, when the City asks, “Can we, pretty please, impose this tax?”, reply with, “Yeah, we suppose so”?

If we can’t get out of that second study, we should at least have it address new developments, such as a paper put out by the Grassroot Institute saying, in effect, “Vacant homes don’t cause obscene housing prices, but a screwed-up building permitting system sure does!”

Folks on the Neighbor Islands:  Don’t laugh. You might be next!