Governor's Intent to Veto List Released!
By Tom Yamachika, President Gov. Ige has released his “Intent to Veto” list required by the Hawaii Constitution. Any bill that is enrolled to the Governor and is NOT on the list will become law. Bills that are on the list may or may not be vetoed. Four bills the Foundation has been following made the list. Two of them were controversial, including HB58, the “Enola Gay Frankenbill,” and HB862, the bill that would stop sharing Transient Accommodations Tax with the counties but would let the counties impose their own TAT surcharges. Bills that did not make the list, and that will become law, include HB1041, which conforms state law to the Internal Revenue Code but does not pick up key changes in the American Rescue Plan Act and the Consolidated Appropriations Act; HB485, which increases the rental motor vehicle surcharge tax from $5 to $8 over several years; and HB1298, which raids $95 million from non-general funds of various departments (including $15 million from the Department of Taxation). The four bills that made the list, and the Governor’s rationale for putting them there, are as follows. HB1299 HD1 SD1 CD1 – RELATING TO NON-GENERAL FUNDS This measure repeals, reclassifies, or abolishes funds within various departments, and transfers unencumbered balances to the general fund. RATIONALE: This bill is unconstitutional. In particular, the transfer of funds from the Milk Control Special Fund to the general fund is a violation of the separation of powers doctrine, as the fees are assessed by the Department of Agriculture through administrative rules and not by the Legislature through statute. This measure would have deposited these fees into the general fund, but by statute, the fees must be expended for purposes of administering the Milk Control Act instead of being used for general public purposes. The bill also unconstitutionally reclassifies the Department of Hawaiian Homelands’ Hawaiian Home Receipts Fund (HHRF) as a trust account. This reclassification directly contradicts the Hawaiian Homes Commission Act, which explicitly identifies the HHRF as a trust fund. This change could impair or reduce the benefit of oversight that is normally provided by a fund, which may require consent of the U.S. Congress as determined by the Department of the Interior. Additionally, Hawaiʻi’s fiscal situation has improved dramatically since the Governor’s Executive Biennium Budget and Financial Plan was presented to the Legislature in December 2020, reducing the pressing need for the extraordinary revenue actions proposed in HB1299. HB58 HD1 SD1 CD1 – RELATING TO STATE FUNDS This measure temporarily suspends certain general excise and use tax exemptions and increases conveyance taxes for the sale of non-commercial properties valued at $4,000,000 or greater. RATIONALE: Hawaiʻi’s fiscal situation has changed so much since this bill was introduced that there is no longer the pressing need for the extraordinary revenue actions proposed in HB58. There is concern that due to the county definitions of commercial property, there may be inadvertent negative consequences on family-owned businesses. Additionally, the increase in conveyance tax rates for non-commercial properties could adversely affect the development of affordable rental housing, one of the Administration’s major priorities. HB862 HD2 SD2 CD1 – RELATING TO STATE GOVERNMENT This measure makes significant changes to the Transient Accommodations Tax (TAT), including repealing TAT funding for the counties (but authorizing counties to establish their own TAT capped at 3%), repealing TAT funding for the HTA, and amending TAT funding to the Hawai‘i Convention Center Enterprise Special Fund. The bill makes significant functional changes to the Hawai‘i Tourism Authority (HTA), including repealing the Tourism Special Fund, repealing HTA’s procurement exemption and HTA’s market development-related research authority. It also switches HTA funding to ARPA and reduces HTA’s funding levels by 24%. RATIONALE: Coupled with HB200, HB862 would not authorize HTA to operate the Hawaiʻi Convention Center (HCC) beyond the $11M ceiling. This low ceiling will restrict the HCC from attracting additional events and fulfilling its mission. Funding requested in the Administration’s Executive Biennium Budget allows the HCC to operate at full potential. The Transient Accommodations Tax was established to provide dedicated funding to allow visitor spending to mitigate visitor impacts on the community. HTA has refocused its efforts beyond marketing to destination management and is looking to strike a more sustainable balance with respect to tourism’s impacts on our community. Shifting funding sources to appropriations from ARPA makes this support less predictable and could undermine HTA’s efforts. HB1296 HD1 SD2 CD1 – RELATING TO STATE FUNDS This measure seeks to re-allocate funds from the state’s tobacco settlement monies, while making other appropriations for staffing in various departments. Part 1 repeals the Tobacco Control and Prevention Trust Fund and transfers any remaining balances into the general fund, eliminates settlement monies dedicated to the University of Hawai‘i’s revenue-undertakings fund by July 2033, and caps the total amount in the Tobacco Settlement Special Fund at $4.3 million annually. Part 2 makes an emergency appropriation to the state’s Emergency Medical Services program, while Part 3 appropriates funding for 2 permanent and 5 temporary positions in the governor’s office. Part 4 requires the university to reimburse the state for fringe benefit costs for any position paid for by a special fund. It also prohibits the University of Hawai‘i Cancer Center from using cigarette tax revenue for research or operation costs. Part 5 establishes a threat assessment team at the Department of Defense and Part 6 appropriates funding for 1 full-time position at the Department of Human Resources Development. RATIONALE: Hawai‘i’s fiscal situation has changed so much since this bill was introduced that there is no longer the pressing need for the extraordinary revenue actions proposed in HB1296. By repealing the Tobacco Settlement Trust Fund, this bill eliminates a consistent funding source for tobacco control and prevention programs. While monies from the Master Settlement Agreement can fluctuate from year to year, the creation of a professionally managed trust fund for settlement monies provided a steady and reliable source of revenue for highly effective public health and prevention initiatives. This move was lauded for its creativity in leveraging private dollars to ensure steady long-term funding. Additionally, HB1296 would significantly increase costs for the University of Hawai‘i, while simultaneously eliminating the UH Cancer Center’s ability to conduct cancer research and cancer center operations with cigarette tax revenue. The potential public health impacts of defunding prevention and cessation programs will likely amount to significantly higher cost to the state’s health systems in future years. While HB1296 was likely an effort to increase general fund revenues in a time of financial uncertainty, recent improvements in the state’s revenue forecast eliminate the need for this bill. Additionally, the measures that passed out of the respective chambers solely addressed the Tobacco Settlement fund. Sections two through six in the final version were not provided an opportunity for public comment.
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Showdown of the Juggernauts
There is a huge fight looming on the horizon. I’m not just talking about Curtis “The Bull” Iaukea and Lord “Tally Ho” Blears versus Handsome Johnny Barend and the unforgettable Ripper Collins in “50th State Big Time Wresting” at the Civic Auditorium. I’m talking about something much, much more epic. In one corner you have the State of Massachusetts and in the other corner its neighbor the State of New Hampshire. Their arena: the Supreme Court of the United States. How did this fight come about? The traditional rule, which is followed by 41 states and the District of Columbia (the remaining 9 states, such as Alaska, Florida, and Nevada, don’t have income tax), is that income that has its source in a state other than where you live (the “non-residence state”) has the right to tax only that income. Your residence state has the right to tax you on that and any other income wherever you earn it, but it must give you a credit for tax legitimately paid to a non-residence state on income earned in that state. Before COVID-19, folks who lived in New Hampshire were commuting to work in Massachusetts. Massachusetts applied its income tax to them as non-residents. New Hampshire is one of the 9 states without an income tax. So, the only state income tax these folks paid was to Massachusetts. Then, along came COVID-19. A number of these employees, perhaps as many as 100,000, started to work from home. They found, to their delight, that Massachusetts tax didn’t seem to apply anymore because they weren’t commuting to Massachusetts. Massachusetts, however, didn’t really like the idea of its tax revenue being squeezed just because people stopped commuting. So, it adopted an emergency tax rule saying that the salary of any nonresident who worked for a Massachusetts company and was teleworking because of the pandemic would still be subject to Massachusetts nonresident income tax. “You can’t do that, it’s unconstitutional!”, New Hampshire roared, and marched to the Supreme Court to begin the epic fight. “Yes, we can!” bellowed Massachusetts. (If you’re interested in the details of their arguments, you can read them here.) Most recently, the Biden administration filed its brief, arguing that it’s inappropriate for the Court to stick its nose in now. It said that individual taxpayers who were hurt could file their own appeals and thus give the States’ courts a chance to weigh in before the Supreme Court would need to act. The outcome of that dispute may affect us here at home. Recently, some local folks established a “Movers and Shakas” program where they gave selected Mainlanders a free trip here in return for a commitment to stay on Oahu for 30 days and try being part of the Hawaii Ohana. The program drew 90,000 applicants for 50 spots in the first cohort, and the program is preparing for a second cohort. One thing that Movers and Shakas might not have told the winners is that their income might be considered Hawaii source, and taxable in Hawaii, because they are physically in Hawaii when they are working. The University of Hawaii Economic Research Organization (UHERO) put together a brief on this issue, calling it “Taxing Income in the New World of Teleworking.” It observed that some have called the traditional residence state and non-residence state rules archaic and ill-equipped to deal with what our economy has become over the years. UHERO considers this COVID-19 wrinkle a great opportunity to rethink the rules that apply to individuals who live in one state but work for an employer in another. Telework is here to stay. So are taxes. Now is a very good time for states and businesses to start thinking and talking about how the two mix. Taxing Government Largesse
We’ve recently found out that the City & County of Honolulu is going to take 10,000 applications from vulnerable people and families who need help paying rent or utility bills. So, it’s a good time to review the tax rules applicable to payments like these so recipients don’t get nasty surprises from the tax agencies. Usually, when people receive money or something else of value and don’t have to pay it back, it’s considered “income.” Taxes are imposed against income. In Hawaii, we have the net income tax and general excise tax among others. But there is an exception, not written into the statute books, for “general welfare” payments. To qualify, a payment must (1) be made pursuant to a governmental program, (2) be for the promotion of the general welfare (that is, based on need), and (3) not represent compensation for services. In Tax Information Release 2020-06, our Department of Taxation says that it will generally respect the federal tax treatment for purposes of our income tax. For GET, it says that although GET normally applies to amounts received by a business that replace income, it will not enforce GET against PUA payments, forgiven loans under PPP, and EIDL grants. Under this definition, individual applicants who receive aid from the City & County of Honolulu shouldn’t be taxable on the aid received even though those applicants’ bills are being paid for them. But what about the landlords and utility companies, since the payments are being made from the City & County directly to them? General welfare treatment doesn’t extend to the landlords and utility companies because they are still providing the use of realty, goods, or services and are getting paid for it. As the Department explains: “Landlords are subject to GET on these amounts whether the payments are received from the tenants or directly from the agency that administers the relief program on behalf of the tenant.” The same reasoning applies to income tax, federal and state. In the legislative session that just ended, there was much debate about unemployment compensation. The federal government, in the American Rescue Plan Act, decided to exempt up to $10,200 of unemployment compensation received in 2020. Hawaii decided not to use that exclusion, making unemployment compensation taxable. (Actually, because the American Rescue Plan Act is a 2021 law, the Legislature wouldn’t normally even consider conforming to that provision until the 2022 legislative session, but was debating it this time because it applied to 2020 income.) But what about the general welfare exclusion for such payments? They seem to satisfy all three criteria, namely that the payments are not for actual work, are based on need, and come from a government agency. The problem is that there is a federal law, Internal Revenue Code section 85, that specifically says that unemployment compensation is taxable gross income. Hawaii’s income tax law conforms to the federal law in that respect. Laws that are black and white supersede tax agency practices and positions, or at least are supposed to. Thus, people who received unemployment compensation will have to pay income tax on it even though the federal government will exclude some of it. In times of need, the government gives, and sometimes it takes back as well. We hope that this summary will be helpful for the people and companies involved. |
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