Everyone knows that the state, like others around the country, is facing a serious financial crisis as tax revenues ebb in the wake of the recession, but this would hardly be a time to raise taxes as families struggle to
Everyone knows that the state, like others around the country, is facing a serious financial crisis as tax revenues ebb in the wake of the recession, but this would hardly be a time to raise taxes as families struggle to make ends meet.
Well, lawmakers appear to be shying away from raising any of the state’s major taxes, such as the net income and the general excise tax, but that hardly prevents them from raising taxes on specific constituencies. In fact, if they can hit the well-heeled taxpayers, they think they might be able to get away with it. Such is the case of a proposal to levy a real property acquisition tax.
It appears that this measure is proposed to generate additional revenue by the imposition of a real property asset acquisition tax on all transfers and conveyances in the state, similar to the conveyance tax. Like the conveyance tax, revenues derived from this tax are also diverted to the rental-housing trust fund, the land conservation fund and the dwelling unit revolving fund.
While the intent of this measure is to provide an additional stable source of revenue, lawmakers need to remember the real estate market tends to be volatile. Although Hawai‘i has not suffered the severe depression of housing values like markets on the Mainland, it nonetheless is beginning to see signs of weakening demand for real property of all kinds. As a result, the proposed new tax, like the conveyance tax, will no doubt experience sharp swings in the amount of money generated.
Although there are no rates currently in the bill, it appears that the tax rates would change depending on the size of the transaction, with more than likely higher rates on higher value transactions. No doubt, the thought is that if the property is more expensive, it is being purchased by a well-heeled taxpayer who can afford the higher tax rate. At least this seemed to be the logic behind the existing conveyance tax rates where the rates are highest on transactions that are more than $1 million.
As with any tax, it is an additional imposition and the increase will be passed on to taxpayers and consumers. For example, residential properties will be increased by the additional tax borne by the property, and commercial or industrial property owners will, no doubt, pass on the added costs of the tax to their consumers in the form of higher prices.
Until a few years ago, the conveyance tax was long recognized as not being a source for raising revenue. Rather, it was implemented as a means by which to gather data for real property tax assessors and assist them in the valuation of property. Not only did lawmakers double the conveyance tax in 1993, but they earmarked the increases for specific programs, thereby ignoring the state auditor’s concern about the creation of special funds and the proliferation of earmarked sources of revenues.
In 2005, lawmakers again increased the conveyance tax and structured it to increase as the value of the property rose and took specific aim at transactions that involved residential property that would not be owner occupied. This latter action demonstrated how not fully understanding the implication of this tax would impact other areas. While on the one hand legislators are trying to encourage affordable rentals with all sorts of housing programs including the rental housing trust fund to which part of the conveyance tax accrues, on the other hand they made the acquisition of residential rental property more expensive, be it single-family or multi-family structures. In the case of the latter, such a transaction would probably involve a seven-figure valued property.
The current measure under consideration by lawmakers would also have the same effect on residential rental housing as well as on commercial and industrial real estate. This is just one more reason why investors shy away from setting up businesses in Hawai‘i. This is just not a way to balance the state’s budget, especially at a time when the economy is in the doldrums.
It is becoming increasingly obvious that despite all the political rhetoric that Hawai‘i’s people are overtaxed, policymakers continue to search for more and more ways to heap another tax on a people that already find it difficult to make ends meet.
Although lawmakers are finding it a challenge to rein in spending, it hardly seems a time to add yet another burden on families who are already recognized as carrying one of the heaviest tax burdens in the country.
• Lowell Kalapa is president of the Tax Foundation of Hawai‘i. The Tax Foundation is a private, nonprofit, non-partisan, educational organization established to research issues confronting governments in the area of public finance, taxation, and public administration. It is supported entirely by private contributions.
