A Tax Game-Changer for Nonprofits
This week again, we spotlight some legislation that has the potential to change our tax system in very bold ways. Our focus is on Senate Bill 3201, which fundamentally changes how the general excise tax (GET) applies to nonprofits. Under federal tax law, exempt organizations such as charities are still taxable on certain kinds of income, called “unrelated business taxable income“ or UBIT. The idea is that if a tax-exempt organization is conducting a business activity that competes with a for-profit organization, it should pay the same tax on that business activity as the other organization does. In contrast, our GET allows tax-exempt status to a number of organizations, including what we know of as charities, but then taxes almost anything that is considered “fund raising.” If the primary purpose of the activity is to raise money, the activity is taxable even if the money supports the charitable aims of the organization. So, under the GET, if someone buys a $100 ticket to a fundraising dinner, the charity is taxed on the $100 even though the stew and rice dinner that the ticket buys is worth $8, and everybody knows that all or most of the $100 is intended to be a donation to the charity. In both the federal and state systems, income that is importantly related to the purpose of the charity, such as tuition charged by a school, is exempt. A lot of people who help with or lead nonprofits get stuck here. Most people who have financial training know what UBIT is, so they have some idea of when federal income tax needs to be paid. Not so with “fundraising“ and the GET. That subject isn’t taught in schools, especially schools outside of Hawaii. Some people who are told the true scope of what the GET covers can’t believe what they’re hearing. That’s where SB 3201 comes in. It would change the GET law so that income of a charity’s unrelated business would be exposed to GET (as it is now) but other “fundraising” would be left alone. Bill similar to this one have been introduced in the legislature before but haven’t made it very far. This one, as of the date of this writing, has crossed over to the House and, as of this writing, has cleared two of three House committees. It shows some promise of being able to reach the finish line. If enacted, this bill would make it much easier and simpler for nonprofits to understand where tax begins and ends. This would be a big help to the nonprofits, many of which operate on a shoestring budget and can’t normally afford sophisticated financial advisors like attorneys and CPAs. But—and this may be the point the legislative committees are trying to make—the difficultly in drawing that line shouldn’t be an excuse for not doing anything about the problem. We have a social problem in that our tax system is regressive. It hits people harder when they have less of an ability to pay it. How do we address that problem in a fair and thoughtful manner, as opposed to simple-mindedly saying that we should enact more and larger taxes that really beat the heck out of those who have some money?
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A Bold Step Forward from Diapers
Our latest tale of legislative drama starts from diapers. Literally. House Bill 2414 in this year’s legislative session proposes to enact a general excise exemption for diapers. The bill recites that diapers are a large expense for Hawaii families with small children and are essential to babies' and toddlers' health as they each require about fifty diaper changes per week, or roughly two hundred diaper changes per month. However, according to the National Diaper Bank Network, one in three families struggle to afford clean diapers for their children. Our general excise tax, the bill supporters point out, is highly regressive, meaning that people on the lower end of the income spectrum spend comparatively more of their hard-earned dollars on general excise tax. This problem has been known for several decades but has been met with inaction for the most part. It’s been well known that in this state, lots of things that are considered necessities of life are subjected to the GET, including food and medical care. So, the Chamber of Commerce of Hawaii had an interesting comment about this diaper bill. “While the Chamber supports making a general excise tax exemption for the manufacture, production, packaging and sale of diapers, we believe the bill does not go far enough.,” it sald. “The Chamber respectfully asks the committee to consider an amendment that would make a general excise tax exemption for the gross proceeds or income from the manufacture, production, packaging, and sale of food and medicine. Food and medicine are the most important and basic life necessities in this world, and still some struggle to provide those items for their families. We believe including food and medicine into the general excise tax exemption would further help families in need.” Similar comments were made by the Hawaii Restaurant Association, Hawaii Food Industry Association, and Retail Merchants of Hawaii. Apparently, that was enough to spur the Senate Committee on Energy, Economic Development, and Tourism into action. On March 18, the committee voted to amend HB 2414 to add an exemption for food and medicine. The text of the amended bill was not released by our publication deadline. An exemption for food and medicine would indeed be a bold step forward. It would undoubtedly have a massive revenue cost, but a massive impact as well. To be sure, such exemptions have been proposed in the past and have mostly fallen to the wayside. Lots of arguments have broken out, not only here but also in other states that have similar exemptions in their sales tax, about what kinds of food and medical care are “necessities,” presumably deserving of the exemption, versus “luxuries,” which presumably are not. For example, would you exempt a doctor’s fee for performing plastic surgery? Would your answer be the same if the surgery was necessary to put a person back together after getting in a car crash? If a line needs to be drawn somewhere, how do you draw it? But—and this may be the point the Senate Committee is trying to make—the difficultly in drawing that line shouldn’t be an excuse for not doing anything about the problem. We have a social problem in that our tax system is regressive. It hits people harder when they have less of an ability to pay it. How do we address that problem in a fair and thoughtful manner, as opposed to simple-mindedly saying that we should enact more and larger taxes that really beat the heck out of those who have some money? THE RECENT ARTICLE WITH A PROPOSED SOLUTION TO MAUI’S HOUSING CRISIS IS REVEALED! The WMTA urges you to join with us in our ongoing campaign to increase the housing supply on Maui and bring down the costs! The “Tokyo Model,” referenced in the Grassroot Institute of Hawaii’s letter below is remarkable! We have to change the way we are operating and immediately begin corrective actions for change. The Maui County Council majority recently passed an Amendment to the West Maui Community Plan which removes the ability for residential housing to be built here on hundreds of acres of land and G. Ignored legal warnings of potential liability for taking that action. When has taking away property rights resulted in more housing?? Seems obvious to most people that our governmental representatives are not moving in the right direction and certainly the needs of West Maui Residents for more housing is being ignored as a result. Remember, Power can be transferred by your Vote. Please choose to support WMTA and our Political Action Committee . Mahalo, Joe Pluta, President ------------------------------------------------------------------------ Dear Friend, When you’re a hammer, the saying goes, everything looks like a nail. And when you’re a fan of big government, regulation is the go-to solution to every problem. That may be why so many of our policymakers try to address Hawaii’s housing crisis via big-government solutions — like taxes on empty homes, government-funded housing projects and regulations to limit or mandate certain kinds of development. Extensive research, however, shows that big government is the reason for Hawaii's housing shortage to begin with. So can we please try something else? The reality is that if we want to turn things around, we shouldn’t be trying to import policies from areas with high housing costs, like San Francisco, or countries that have vastly different social and government structures, like Singapore. Instead, we should be looking at places that have managed to keep housing affordable, like Tokyo, where housing prices have been relatively flat for two decades. On my latest “Hawaii Together” program on the ThinkTech Hawaii network, I discussed the “Tokyo model” for housing and what it could mean for Hawaii with Edward Pinto, head of the American Enterprise Institute Housing Center. Pinto has spent decades studying housing and development, and he easily pinpointed the origin of Hawaii’s high housing prices. According to Pinto, Hawaii, had robust housing construction up until about 1972 or 1973, but then it collapsed and it has never recovered. Reasons for that, he said, include the state Land Use Commission, established in 1961, and Hawaii Environmental Policy Act of 1974, both of which are heavily involved in land-use management. "It all comes down to land use and making things illegal," said Pinto. "Basically, … reasonable density — we call it light-touch density — has been made illegal [in Hawaii]. Having two units on a lot is illegal. And all of these things just drive up the land cost.” As a result, Pinto said, Hawaii has one of the most expensive housing markets in the world, just behind San Francisco and just ahead of London. In a guest appearance on Sen. Stanley Chang’s “Our Homes” podcast, Pinto said a growing body of research shows that “subsidized housing, inclusionary housing, rent control and land-use policies that constrain supply end up creating scarcity and raising costs. … The reason that these policies have failed is that they don’t tackle the root cause, but rather the symptom.” Chang is a well-known advocate of the so-called Singapore model of housing, which is the basis for his ALOHA homes bill that he has introduced in the Hawaii Legislature for several years now. Pinto said that he doubts that model could be reproduced in Hawaii, for several important reasons. “For example,” he said, “Singapore, after its independence, had really a clean slate. Singapore back in the 1960s consisted mostly of shanty towns, and the government today owns 90% of the land and it can acquire private land at low costs. “Furthermore, Singapore also has a highly effective public leadership cadre and it really has only one form of government that is not as responsive to voters necessarily, which allows it to overcome many barriers to increasing supply. “So the downsides for applying such a model to Hawaii,” he said, “could be that this Singapore model may not necessarily be scalable. And if you end up with a failure, it could come at a heavy cost, because you could end up with public housing, as is very common in the mainland, where you have basically increased racial and income segregation, you have also trapped many residents in housing and it has reduced social mobility." Finally, he said, "generally, these projects, if the government gets involved, tend to be very expensive and they tend to exceed the budget.” For Hawaii, Pinto said a better option would be the sort of “light-touch density” zoning that has helped Tokyo produce adequate affordable housing. The secret to Tokyo’s success? Property rights. After World War II, Pinto explained, Japan’s new constitution provided for strong property rights. By the 1980s, this included the right to develop your property as you wished, so long as it wasn’t a nuisance. “You could build duplexes, quadruplexes, triplexes, high-rise buildings. As a result,” Pinto said, “Tokyo has built more housing in a period than the entire state of California by a multiple." This has enabled Tokyo to meet the needs of its population, in terms of keeping housing affordable for both renters and homeowners. Pinto said light-touch density relies partly on "by-right" zoning, which allows projects that meet all zoning requirements to proceed without going through a discretionary approval process. This, in effect, legalizes small, fast, economical, adaptable and simple additions to housing supply while still accounting for health and safety. Pinto estimated that if Hawaii were to adopt such policies, Oahu alone could add 26,000 homes over the next 10 years. On Chang's "Our Homes" podcast, Pinto’s colleague at the Housing Center, Tobias Peter, said it also would be helpful for Hawaii to make more land available for residential use. Specifically, as the Grassroot Institute of Hawaii has noted, with only 5% of Hawaii land available for residential construction, an increase of only 1 or 2 percentage points would translate to a 20% or 40% increase, respectively, in the land available for housing. I realize, of course, that there is no such thing as a quick fix to Hawaii’s housing crisis. It is a problem that has been decades in the making, and it is being made worse through fashionable policies like inclusionary zoning. I also have no doubt that the people who want to use the government to solve the problem are well-meaning. But the data is clear: If we want our children and grandchildren to be able to find affordable homes in Hawaii, we need to liberalize our state and local land-use and zoning regulations. E hana kākou! (Let's work together!) Keli'i Akina, Ph.D.
President / CEO Grassroot Institute of Hawaii |
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