Some House lawmakers have hatched a complex plan to export more of Hawaii’s weighty tax burden to non-residents, but it would require an amendment to the Hawaii state Constitution and a huge leap of faith on the part of the voters.

House Bill 1208 and House Bill 1209, which lawmakers say go “hand in hand,” together propose a tax system overhaul. The first bill asks the voters to amend the constitution to allow the state to impose property taxes.

If that idea wins approval — which is a long shot — HB 1209 would then “suspend” the Hawaii state personal and corporate income taxes.

Underlying the proposal is a sense among some lawmakers that Hawaii’s existing system of taxation is far too generous to out-of-state investors who snap up homes and other property here, and then benefit from the lowest property tax rates in the nation.

Supporters of the bills say they want to boost property taxes on non-owner occupied properties, and then use the extra money to reduce the income tax burden now carried by state residents to zero.

The available evidence suggests that will be a tough sell. The state constitution gives the authority to impose property taxes exclusively to the city and counties, so HB 1208 asks the voters to grant the state a major new taxing power. A similar proposal in 2018 was unpopular with the public.

Still, HB 1208 and HB 1209 won preliminary approval from the state House on Friday, and will now get a hearing in the House Judiciary and Hawaiian Affairs Committee.

What would normally be a wonky debate over tax policy seems to be getting a jolt of political energy this year from the surge in Hawaii real estate prices during the pandemic. House Democratic Majority Leader Della Au Belatti described that price escalation as “stunning.”

“Home prices are still increasing, and why? Because there’s speculation, and there’s out-of-state residents who are now buying at the expense of our local people,” she said.

Now is the time for the state to deal with a longstanding “imbalance” in the existing system of state and local taxes, Belatti said. State government here finances an array of activities that in other states are handled by cities and counties, and are normally financed through property taxes.

That includes public hospitals, ambulance services, jails, and most of all a huge, statewide Hawaii public education system. Lawmakers say the state Department of Education is the only educational system in the nation that is entirely state funded. 

That system allows the city and counties to keep property tax rates exceptionally low, while the state imposes some of the highest income tax rates in the nation. And Hawaii income taxes place a particularly heavy financial burden on poor working families, critics say.

Meanwhile, state data shows that for the past decade about 25% of home sales have been to people from out of state. More than 40% of Hawaii and Kauai County home sales were to non-residents in 2018, while more than 15% of Oahu sales were to out-of-state buyers that year.

Many believe property taxes are one of the best tools for going after non-residents or part-time residents who are not paying their “fair share” for the services that the state must provide, Belatti said.

She suggested HB 1208 and HB 1209 taken together present an opportunity to provide broad tax relief for Hawaii residents who own and occupy a single property here.

The challenge is “how do you provide relief to residential homeowners, but still pay for all of the services that government is required to pay for?” she asked. “The bigger issue is, how do you also tax non-residents who may or may not be paying income taxes?”

House Speaker Scott Saiki and House Finance Chairwoman Sylvia Luke, two of the most powerful members of the Legislature, co-sponsored HB 1208 and HB 1209 with Rep. Mark Hashem.

Tom Yamachika, president of the Tax Foundation of Hawaii, is a skeptic. He noted the constitutional amendment as written does not say what kinds of property would be hit by a state property tax surcharge, or how large that surcharge would be.

He also worried that this Legislature or lawmakers in the future will be free to change the terms of this arrangement once the amendment is approved. He warned that if the proposed constitutional amendment passes, “the genie is out of the bottle.”

“There is no obligation for the Legislature to pass or enact House Bill 1209 if the constitutional amendment is enacted, and there is no obligation for any subsequent Legislature to stick with it any time after that,” Yamachika told Belatti.

“So, it can be repealed the next year, it can be repealed the next minute. Any number of things could happen, and this Legislature is in no position to … hamstring the actions of a subsequent one, and so, that’s what we’re afraid of,” he said.

Ken Hiraki, lobbyist for the Hawaii Association of Realtors, described the bills as “counter-productive and distracting” because they shift lawmakers’ focus away from the urgent need to shore up the local economy and reverse the damage done by the pandemic.

“Instead of focusing on ideas for innovative development to help us climb out of this hole, this bill will give us a deeper hole,” Hiraki told the House Economic Development Committee last week.

HB 2018 will create “a new double tax on real property,” Hiraki predicted, and the new tax will be passed on to renters in the form of higher rents. That will hurt working families, seniors and small businesses already struggling to pay rent.

It will also result in higher prices for goods, services and groceries, he said.

Hiraki told lawmakers the real estate market has been one of the few bright spots in the economy during the pandemic, and “I think we have to do our best to maintain what we have and not bring this sector down as well.”

Hashem, who introduced the bill, said it won’t be possible for landlords to simply pass the tax on to their tenants because market forces won’t allow it. “The landlord will try to pass that on, but what he’ll find is people will start moving out, and then the market will resettle, and then readjust,” he said.

He predicts that if his bills pass, local property owners will see some increase in their property taxes but also a decrease in their overall tax burden because “we’re making the snowbirds pay their fair share.”

And state Rep. Dale Kobayashi countered what he described as “the myth” that endlessly escalating property values in Hawaii is a good thing.

“In my lifetime a home went from about $20,000 on the average in central Honolulu, for an average home, to that same property being worth about $1 million now,” he said. “The idea would be that that’s good for the people in Hawaii. I would say, that it is not.”

At the beginning of that long price escalation, “anybody with a job, any kind of job, owned a home, which I believe is what America is all about,” he said. Now, people work multiple jobs and can still never afford to buy a home, while others are giving up and leaving the state.

The bills are opposed by Maui Mayor Michael Victorino, Kauai Mayor Derek Kawakami, Maui County Council Chairwoman Alice Lee and the Chamber of Commerce Hawaii, but supported by the Hawaii State Teachers Association.

The last time the Legislature reached out to try to get some control over property taxes was in 2018, when lawmakers caused an uproar by proposing a constitutional amendment to authorize a state surcharge on property taxes for residential investment properties.

The money from the surcharge was supposed to go to fund public education, but the counties successfully sued to invalidate the constitutional ballot question. Weeks before the general election the state Supreme Court ruled the language in the ballot question was not clear enough.

The question remained on the 2018 ballot because the court ruling came too late to remove it, so the voting that year served as a kind of straw poll on the issue. The voters resoundingly rejected the idea of giving the state authority to impose the property tax surcharge for education by a 2-to-1 margin.

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