WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers
To view the archives of the Tax Foundation of Hawaii's commentary click here. Weekly Commentary For the Week of September 3, 2018 How Long Does It Take To Have A Home On Kauai? By Tom Yamachika, President Today, we focus on Kauai real property tax, thanks to an alert reader who has given us a horrifying account of something so commonplace as buying a home there. How long do you think it takes between buying a home on Kauai and having the “home exemption” effective for real property tax there? Did you guess 21 months? That’s right, the better part of two years. Suppose a couple getting on in years, tired of the hustle and bustle in New York, or San Francisco, or Silicon Valley, decides to move to Kauai. They buy a house there and move in October 2017. To have a home exemption recognized for real property tax purposes in Kauai, an application for the exemption needs to be in by September 30th. Darn! The deadline has already passed. So, the form, when filed, will be in the batch due on September 30, 2018. Exemptions applied for in that batch will be effective for the next succeeding fiscal year, and that year would begin on July 1, 2019. From October 2017 to July 2019 is twenty-one months. What difference does that make? The most favorable property tax classification on Kauai is “Homestead,” currently with a tax rate of $3.05 per $1,000 of net taxable value. To get that classification, a home exemption must be in place. And, a home that doesn’t qualify for a home exemption and is valued at $2 million or more is classified as “Residential Investor” with a tax rate of $8.05. That’s right, it would be more than two and a half times the property tax of a homestead. (And if the property is valued at less than $2 million, the classification is “Residential” with a tax rate of $6.05, which is a little better but it’s still almost double the rate of Homestead property.) But wait, there’s more! If the property tax surcharge amendment passes on the November ballot, the State will be authorized to tax that property even more, as it will now fall into the same classification as homes held by evil, nasty, foreign real estate speculators. Although it’s unclear what kinds of “investment real property” would be subject to the surcharge, Residential Investor property would surely be included. We don’t know how much the surcharge is going to be, but in the 2017 legislative session the number that appeared in proposed implementing legislation was $7.50. The $7.50 would be added to the $8.05, making the total tab $15.55, or $31,100 per year on a $2 million property, as opposed to $6,100 that would be due under the Homestead classification. If we don’t count the state surcharge, the 21 months result in the County of Kauai pocketing $17,500 in extra tax from the elderly couple who have occupied the Kauai house as their home since they bought it. If the state surcharge were in effect, the $17,500 taken would mushroom to $43,750. Hawaii is supposed to have the lowest property taxes in the nation, but this couple certainly wouldn’t be feeling the love in their situation. And that doesn’t even include the Conveyance Tax that was paid to the State back in October 2017 when the property changed hands. The rate of tax on a $2 million property is $6.00 per $1,000, so another $12,000 needed to be paid by someone. All these tax shenanigans are enough to drive folks straight to the airport where they can move to somewhere else with a much better cost of living. Better watch out, because some of our folks are doing just that!
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WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers
To view the archives of the Tax Foundation of Hawaii's commentary click here. Weekly Commentary For the Week of August 26, 2018 Raising Taxes means Decreasing Prices? By Tom Yamachika, President I’ve often heard the argument that taxes on Hawaii real property are too low. Because the taxes are low, the argument goes, prices are driven sky high, leading to economic pandemonium. But is that really true? Maybe it’s just a question of semantics. Suppose I agree to sell you a house for $500,000. But we aren’t able to get our act together before the end of the year, and a new $2,000 tax needs to be paid. Being reasonable people, we agree to “go halfsies” on the new tax. You agree to pay $501,000, and after the tax is taken out I am left with $499,000. From the seller’s perspective, the price has indeed gone down. I am accepting $499,000 for a $500,000 house. But the buyer’s cost has gone up. You are now forking over $501,000 for that house. According to conventional economic theory, the addition of the tax will cause the price net of tax either to stay the same or to drop, up to the amount of the tax. But the buyer’s cost would not go down, and it could increase up to the amount of the tax. In a pure buyer’s market, for example, you could make me eat all the new tax, so you would still pay $500,000 and I’d have to drop my price to $498,000. By the same token, in a pure seller’s market you would need to pay $502,000 and I would still get the $500,000 I was expecting. The seller’s price might go down, but the buyer’s cost would probably go up. From the buyer’s perspective, now that you had to part with more of your hard-earned cash, are you now more motivated to speculate, churn the market, and drive up our cost of living through the roof? Regardless of your feeling, the cold, hard fact is that you don’t have more money to play with as a result of the tax. In addition, real property tax isn’t the only feature in the tax landscape. Once upon a time, conveyance tax was imposed at 5 basis points (0.05%) on a real estate transaction. Now the tax can go from 10 to 125 basis points for highly valued properties. If, for example, you are selling a single-family home worth $2 million, the conveyance tax alone would be 60 basis points, or $12,000. That tax is imposed every time the property changes hands. Even if we accept the premise that the Hawaii real estate market will spin out of control unless there are heavy taxes on the real estate, why wouldn’t the conveyance tax be enough to act as the brake we need? And if that isn’t enough, if we’re worried about foreign investors churning the market, we have HARPTA, a law that requires withholding of 5% of the purchase price of any Hawaii real property sold by a foreign person or company. Under a law passed in the 2018 legislative session, the withholding rate is going up to 7.25% on September 15th, in less than a month. The point, of course, is that the real estate industry is already contending with lots in the way of taxes. To recap: Taxes may drive certain prices lower but incurring taxes doesn’t decrease the overall cost of things. And if we need taxes on the real estate market to prevent foreign speculators from spinning it out of control, we already have some and should consider the effects of those taxes, not just real property taxes. WMTA Shares these commentaries, without taking a position unless otherwise noted, to bring information to our readers To view the archives of the Tax Foundation of Hawaii's commentary click here. Weekly Commentary For the Week of August 19, 2018 Cashing In On Production Credits By Tom Yamachika, President In this space, I often have unflattering things to say about tax credits. Every year, legislators propose tax credits for some little-noticed niche in an industry. Sometimes the credit is well thought through, and sometimes it isn’t. Sometimes the desired effect can be accomplished more cheaply and simply, and sometimes the justification for the credit is sketchy at best. For example, I never knew what “preceptors” in the health care industry were (they’re working professionals that provide on-site clinical education and nurture students’ professional development) until bills were introduced in the 2018 session proposing to give them tax credits. “This is all well and good,” I said, “but the amounts are pretty small so why doesn’t the State just write them a check instead of burdening the tax system, which is already complicated enough?” (The credits became law anyway.) One example of a credit that has some meat in its justification claims is the Motion Picture, Digital Media and Film production tax credit. The Hawaii Film Office in DBEDT reported earlier this year that in calendar year 2016, 35 productions spent almost $200 million in qualified expenditures and received about $44 million in Hawaii tax credits in exchange. DBEDT’s Research and Economic Analysis Division translated those figures as indicating $344 million in generated economic activity and almost $80 million in Hawaii household income. The following year, 48 productions registered for the credit, with estimated qualified expenditures north of $268 million in exchange for $55 million in tax credits. According to the Film Office, the estimated total 2017 spending for those productions, qualified expenses or not, was expected to be $320 million, the largest production year in our history since 2010. In addition, productions that get tax credits in Hawaii are required to make an “education or workforce development contribution” to the community. This could include cash contributions or in-kind resources such as internships, professional training workshops, or donations of equipment. This year, “Hawaii Five-O” will begin its ninth season here, “Magnum, P.I.” is back, and we’ve wrapped production on “Jurassic World: Fallen Kingdom,” Marvel’s “Inhumans,” and “Jumanji: Welcome to the Jungle.” Many of these productions are in themselves advertisements for visiting the islands that have provided the lush tropical backdrop for the movie scenes. In short, this program is on a roll. Effective January 1, 2019, Act 143 of 2018 changes the credit program in several respects. A per-production credit cap will be replaced with a statewide $35 million cap, which worries some folks in the industry and in government. Lawmakers have been continuing to tinker with the credit program by floating mandates such as a cultural sensitivity requirement; a requirement to be compliant with ALL federal, state, and county rules and regulations; and adding hiring criteria. Efforts to make the credit fiscally responsible have included a per-production cap and an overall statewide cap on the credit. Lawmakers certainly have their hands full trying to strike a delicate balance between what the industry needs, what the community wants, and what we can afford in lost revenue. Stakeholders should continue to be engaged in the continued evolution of this credit. |
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