Proposed State Improvement Surcharge
By Tom Yamachika, President In the past few legislative sessions, there always had been one or two proposals to raise taxes in a big way. Some of them got pretty far along the road to becoming law, and some of them actually became law. You might recall that in 2017, Act 107 permanently reinstated the “temporary” 9%, 10%, and 11% income tax brackets that we thought we got rid of in 2016. In 2018, a proposed constitutional amendment to allow the State to surcharge the counties’ real property tax made it to the general election ballot, only to be voided by the Hawaii Supreme Court in the eleventh hour. In 2019, Act 3 hoisted the top rate of our estate tax to 20%, tying Washington state for the highest estate tax rate in the country. So what’s in store for 2020? House Bill 1990 starts off by saying this: “The legislature finds that the department of education faces educational infrastructural issues caused by overcapacity and underfunding, while the highways division of the department of transportation faces a threat of inundation and damage to the state highway system caused by climate change as well as transportation infrastructural issues related to overcapacity and underfunding. The legislature also finds that certain state funds will need an additional, temporary source of moneys in the future.” The bill then goes on to establish a “State improvement surcharge” in the General Excise Tax Law. It’ll be half a percent, and it’ll be for five years. The bill now says the surcharge will be imposed between 2031 and 2035…but I have a sneaking suspicion that the overall grand plan is for those numbers to change. Maybe from 2021 to 2025, at least to start. And, lest we forget, “temporary” tax increases have a way of making themselves anything but temporary. Those who remember 1986 might remember the birth of the Transient Accommodations Tax. It was supposed to be only 5%, and only to fund construction of the Hawaii Convention Center. It’s now 34 years later, the rate is 10-1/4%, and the fund distribution section of the tax (section 237D-6.5, HRS) has more ornaments than a Christmas tree, funding tourism marketing, payments to the counties, the Turtle Bay easement purchase, and scads of other things. That isn’t the only example; the 9%, 10%, and 11% income tax brackets I spoke of earlier were enacted in 2009. Those also were supposed to last five years, starting in 2010 and ending in 2015. The rates did indeed sunset, and we were free of them in 2016, but that is where the holiday ended. The State improvement surcharge also has a Christmas tree feel to it, because the money from the tax is supposed to fix our aging school buildings, repair our washed-out highways and byways, pay down interest on our state’s borrowings on the bond market, pay pensions and benefits for state retirees, and fatten our reserve fund for hurricanes so we’ll be ready just in case one hits. Sound like a tall order? A half percent increase in the GET, which is what this is, can be expected to produce 250-300 million dollars each year it is in effect. Those are some serious dollars! And then, five years down the road, people will have gotten used to paying the tax and legislators will have gotten used to spending the money – and if that’s what happens, the likelihood of the “temporary” tax increase becoming a permanent tax increase ticks up, higher and higher. Is this what we want? Is this how we count on our lawmakers to spend the people’s money wisely? Already we see lots of folks throw up their hands, pack their bags, and leave. What fate is to befall the rest of us who stay here and now have to make up for the taxes that otherwise would have been paid by former Hawaii residents taking up residence in Nevada? California? Washington? Colorado? If this is not what you want, now is a good time to let your voice be heard.
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Do You Buy Fuel? Then Be Very Afraid! By Tom Yamachika, President We have occasionally written about a “carbon tax,” something environmentalists appear to be supporting enthusiastically. The basic idea behind one is that a tax is placed upon the purchase of all fuels that result in carbon emissions when the fuel is burned to release energy. The amount of the tax is based on the type of fuel and is priced to be a certain dollar amount per metric ton of carbon emitted into our atmosphere. Hawaii already imposes a state tax on liquid fuels and allows the counties to impose a county fuel tax on top of it. These taxes go to the state and county highway funds. They are meant to raise funds from those who use the highways and byways. Currently, the state tax on gasoline is 16 cents per gallon. The county tax is 16.5 cents per gallon in Honolulu, 17 cents in Kauai, and 23 cents in Maui and on the Big Island. Then, of course, we have our general excise tax, which is imposed on just about everything. That tax feeds our general fund. That tax, including county surcharge, is 4.5% anywhere except Maui, where it is now 4% but with Maui legislators asking the State for permission to impose a county surcharge as well. Finally, we have the barrel tax, currently $1.05 per barrel of petroleum product imported. That works out to 2.5 cents a gallon. Senate Bill 3150 and House Bill 2654 are companion bills that would replace our barrel tax (currently $1.05 per barrel of petroleum product imported) with a carbon tax. The Senate bill was just heard and advanced by two Senate committees after strong and impassioned testimony in support from the Hawaii Climate Change Mitigation and Adaptation Commission, Hawaii State Energy Office, Americans for Democratic Action, Blue Planet Foundation, Imua Alliance, and others. The bill contained these tax rates: The gasoline rate works out to an additional 17 cents per gallon when the bill is signed, an additional 29 cents per gallon in 2024 (over the current tax rate), an additional 41 cents per gallon in 2027, and an additional 53 cents per gallon in 2030. And that’s just the carbon tax. Fuel cost, and GET on the whole thing, are additional.
At the same time, the Department of Transportation is trying to make us accept a “road usage charge,” which would be an annual fee based on miles traveled in the State. The charge being modeled now would be revenue neutral – but we wonder if it will stay that way once our legislators get their hands on it. Finally, don’t think you’ll be spared if you drive an electric car! Most of our electric utilities make electricity by burning bunker fuel, and this tax contains no exemption for utilities. So, if this bill passes, guess what is going to happen to your electric bill. The Flippin' Surcharge & Other Housing Solutions
By Tom Yamachika, President This year’s Legislature has produced some unique proposed solutions to deal with our housing crisis. Senate Bill 2216, introduced by Sen. Stanley Chang, chair of the Senate Housing Committee, proposes an “empty homes tax.“ If you own residential real property in Hawaii and you can’t swear that you lived in it, then you get charged a tax. The annual amount of the tax is 5% of the assessed value of the property. So, for example, if you owned a vacation home in Honolulu worth $1 million and you didn’t live in it, your Honolulu real property tax at the Residential A property classification would be $4,500 per year. The empty homes tax, which you would pay to the State rather than the City, would be $50,000 per year. Even the Department of Taxation, in its testimony on the bill, had reservations. It pointed out that there were some instances of a unit being empty that should be considered for exemption, such as where the unit is being advertised to be rented (or sold), the unit is being renovated, or the unit can’t be lived in because of damage or other conditions. Finally, there was a more fundamental problem: the tax is triggered by a use of real property (or lack of use), it’s levied against the real property owner, and is based on the value of the real property involved. It looks, walks, and quacks like a real property tax. But under our state constitution, at least the way it reads now, only the counties have the authority to impose real property tax. Bzzzt! The State can’t do this. (But note that there are different proposals in the hopper to change the state constitution, as we wrote about last week.) This measure was heard in the Senate Housing Committee (which happens to be chaired by the bill’s sponsor) and was passed. Another innovative approach, which happens to be sponsored by the same Senator, is a “flipping surcharge” set forth in Senate Bill 2040. This bill imposes a tax of 25% of the net proceeds from the sale of residential property if (1) the property was sold within 5 years after it was bought, and (2) the owner isn’t eligible for a county homeowner’s exemption. This bill was heard by the Senate Ways and Means Committee. During the hearing, senators went through some interesting examples. If a home was bought for $1 million cash and it sold for $1 million, the tax would be around $250,000 (in addition to the income tax on capital gains), assuming negligible closing costs. If a home was bought for $1 million with bank financing and it sold for $1 million, with $800,000 going to the mortgagee, the tax would be $50,000. If an owner bought a home for $1 million and spent $500,000 improving it, and it then sold at no gain for $1.5 million, the tax would be $375,000. The Hawaii Association of Realtors also pointed out that the tax would apply if an owner invested in a dilapidated property, fixed it up so it was habitable again, and then sold it, even as an affordable unit. We at the Foundation pointed out that there would be situations where imposing the tax might not be appropriate. Suppose a person is given a long-term job assignment (or military station) here and moves here with family in tow but does not want to give up primary residency. A few years later, the assignment ends, and the person is assigned to state B. The house here is sold to buy one in state B. Wham! The tax applies. By the end of the hearing, some senators had reached the end of their rope. The committee chair decided to hold the bill. What other solutions are going to be thrown at us this year? Lots of things can happen before the end of our legislative session. |
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