Tax Isn’t a Peanut Butter Cup
Once upon a time there were some property developers on Oahu. They thought that agricultural development would be a good thing. There were lots of tax incentives associated with agricultural development. Then they got the idea that putting some solar panels on the land would be a good thing too. There were lots of tax incentives associated with renewable energy. So, they put some solar panels on the agricultural land too. We have agriculture. And we have renewable energy. Are these two great tastes that taste great together? Come on. Let’s be real. We’re talking about property tax, not a peanut butter cup. It turned out to be a recipe for disaster. Clearway Energy Group, for example, submitted testimony to the Honolulu City Council of their plight. These folks built two solar projects on agricultural land, and, they said, incorporate compatible agriculture into their ongoing operations. Solar energy generation is an allowable use on agricultural zoned land under the city’s Land Use Ordinance, they argued. But the real property tax folks saw the situation a little differently. To get the special ultra-low property tax rate for agricultural use, the landowner had to make a “dedication agreement” with the tax authorities. Basically, the landowner promised to use the property for agriculture for a certain period of time. The tax folks saw solar panels on the properties and said, “Uhm, that’s not agriculture.” So, they took away the ultra-low tax rate, and, while they were at it, they took away the property’s agricultural classification. It’s industrial property, they said, which happens to be taxed at a rate more than double the agricultural rate even without any dedications. At the end of the day, Clearway had a real property tax bill of $30,154 for the 2020-21 tax year (they go with a fiscal year ending June 30), but for the 2021-22 tax year the bill jumped to an eye-popping $835,710. Clearway’s tale of woe attracted a lot of attention, so much that the Council is now considering Bill 39, which is supposed to address this problem, and state agencies aplenty, including the Governor, the State Energy Office, and DBEDT, have weighed in. One of the reasons behind this kerfuffle is that this is not just Clearway’s problem. Any solar project that is located on agricultural land is subject to this kind of reclassification, and the financial impact would vary depending on how much solar went on the land and how much of the land was previously subject to the ultra-low rates for land dedicated to agriculture. And then, of course, there is the issue of who is going to pay the enhanced tax if the real property tax folks’ methodology is upheld. Clearway and the other power producers have long-term agreements with power buyers such as Hawaiian Electric. If this enhanced charge becomes Hawaiian Electric’s problem, it then becomes a problem for all of us who pay electric bills. If the enhanced charge impacts the developers, it will send shock waves through the industry of people who finance renewable energy projects because of the risk of a property developer getting overwhelmed by this tax surprise and thereby going into default on its financing. What a mess! Ultimately, the City might legislate itself out of this situation, making some allowances for solar and agriculture peanut butter cups. But for the rest of us the moral of the story is that two great tax-favored tastes won’t always taste great together, and one must be extremely careful when mix-matching tax incentives.
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Tax Workers’ “Get Out of Jail Free” Card
You might not know this, but our tax workers enjoy all kinds of special privileges. Suppose, for example, a tax auditor told all your customers you were a tax cheat, rifled through your garbage, asked embarrassing questions of your friends and maybe some enemies, and even called you a “lazy Hawaiian.” Could you haul the auditor’s tushie into court to be vigorously sued? Apparently, the answer is no. Hawaii Revised Statutes section 662‑15(2) says that state actors are immune from liability for “[a]ny claim arising in respect of the assessment or collection of any tax.” In more recent years, the Hawaii Supreme Court has been giving the tax office even more help and protection. In a case called Medical Underwriters of California, 115 Haw. 180, 166 P.3d 353 (2007), a taxpayer associated with an insurance company was assessed 4% general excise tax, while the taxpayer contended that it was an insurance company and should be taxed under the special 0.15% rate that applies to an insurance solicitor or agent. The taxpayer argued strenuously that it was licensed by the Department of Commerce and Consumer Affairs as an insurance company, so that the Department of Taxation should not be able to classify the company as something else. Our supreme court rejected the argument, saying that the doctrine of equitable estoppel, which the taxpayer was trying to use, “may not be used in such a way as to hinder the state in the exercise of its sovereign power.” The power to tax is a sovereign power; therefore, taxpayer loses. In the 2019 decision Priceline.com, Inc. v. Director of Taxation, the court was faced with assessments against online travel companies for allegedly underpaid general excise tax for facilitating car rentals. The companies noted that they already had endured punishing litigation over general excise tax for the same periods for facilitating hotel stays, and that litigation was resolved by final judgments already entered in the tax appeal court. The court reasoned “that the actions of a specific government official may not deprive the State of Hawai‘i of its sovereign power to collect the taxes it is legally due,” and held that the termination of the hotel stay litigation did not preclude the car rental litigation, even though it was for the same tax and the same years. That language is broad, perhaps several degrees broader than it needs to be. It remains to be seen how far the Department of Taxation will push this get-out-of-jail-free card, and whether the courts will allow it to do so. If, for example, the Department makes a deal with a taxpayer, such as allowing the taxpayer to settle five years of back taxes by paying four of them in full and skipping the fifth, is the Department going to be able to come back a few years later and say that they didn’t like the deal and the taxpayer needs to cough up the money for the fifth year too? We don’t think that any agency should be allowed that much latitude. There is a fundamental difference between saying that the government can be spared from acts of a well-meaning employee having unintentional or inadvertent consequences, and saying that the government can get a do-over on decisions it makes purposefully and intentionally. Yes, the government needs revenue and it relies on the Department of Taxation to collect it, but it needs to remember that the Department needs to do so fairly and not tyrannically. Government is supposed to wield only as much power as the people give to it, and needs to respect where that power came from. Hike Traffic Fines for Profit
The Honolulu City Council wants to raise money for the Honolulu Police Department by adding a surcharge to traffic fines. As KHON2 reports, they say that the money can and should be used to recruit, retain, and equip police officers. It’s definitely a creative idea to raise additional revenue without hiking the property tax. There is a small problem, however. All traffic fines go to the State, not the county, under current law. The City tried to get around the problem before. In the 1990’s, the City passed an ordinance saying that anyone convicted in Honolulu would need to pay a “user fee” of $250 in addition to any monetary or other punishment that the court imposed. That fee was to pay for the costs of prosecution and law enforcement. But our supreme court didn’t buy that story, in a case called State v. Medeiros, 89 Hawaii 361 (1999). Counties don’t have the authority to tax anything other than real property. They can, however, impose user fees. So, if someone wants to visit the city zoo, the City can and does charge an admission fee. Charging a criminal with the costs of law enforcement and prosecution is just and correct, the city said. The court then wondered what kind of services are being supplied to a convicted person that would justify the fee. That would help distinguish the fee from a tax, which the City had no power to impose. Plenty, the City argued. Prosecution and arrest assist the person convicted in preventing further harm to themselves and others, and hopefully, also helps to convince the offender to stop being a lawbreaker and become a productive member of society. Yeah, said the court. It’d be like charging the zoo animals for the service of keeping them caged. We all know what kind of damage a rampaging elephant can do to itself and others. This actually happened in 1994 when an elephant named Tyk got loose and caused havoc before being shot to death by police. So, the argument goes, the Dumbos of this world ought to pull his own weight in connection with the city’s costs to protect him. The court then went on to observe that in George Orwell’s 1984 one of the characters, who had been caught and imprisoned for various crimes, wondered to his jailer whether he was brought to the jail to punish him, or to make him confess. The jailer’s reply: “No! Not merely to extract your confession, nor to punish you. Shall I tell you why we have brought you here? To cure you! To make you sane! Will you understand, Winston, that no one whom we bring to this place ever leaves our hands uncured?” Ultimately, the court found that the $250 charge was a tax, not a user fee, and struck it down. This time, the City Council seems to have learned from that unhappy past. The Council might pass a resolution politely asking the State Legislature to jack up traffic fines and to share the money with the county in which the infraction took place. As to how much, Council Chair Tommy Waters said, “I don’t think they like to be told by the county what they need to do. So I’m asking, I’m asking them to consider it, and we can work on a number as the process goes forward.” State legislators to which KHON2 reached out for comment had nothing to say. Which might have something to do with the fact that all of the legislators in the square building on South Beretania Street need to run for re-election in 2022. In a few short months, the 2022 legislative session will start, and then we will see what fate will come of the request for higher traffic fines. In the meantime, you might want to visit the zoo. Before the admission fee gets hoisted again. |
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