Tax hikes are probably coming to Hawaii, at least for some people.
With revenue growth slowing, government salaries on the rise and a raft of big-ticket items on the official wish list, state Sen. Donovan Dela Cruz, chairman of the Ways and Means Committee, is looking for new ways to raise cash.
Dela Cruz recently chided Gov. David Ige for not proposing his own revenue enhancers, but the senator isn’t waiting around for that to happen.
Almost a dozen options are under consideration. Dela Cruz is the sponsor or a co-sponsor of many of them, and Sylvia Luke, chairwoman of the House Finance Committee, is supporting some of them in the other chamber.
Two measures, Senate Bill 1361, which would increase the tax rate for estates valued at more than $10 million, and Senate Bill 396, which would make more internet-based sales subject to taxation, have already passed the Legislature and been sent to the governor to sign. They will be enacted unless he vetoes them.
Senate Bill 380, a proposed tax on the resort fees charged by hotels, meanwhile, edged closer to passage Thursday and Luke said she expected it to arrive soon on the governor’s desk.
Other proposals include new or additional taxes on short-term rentals advertised on platforms like Airbnb, on commercial leases, on real estate investment trusts (known as REITs) and on time shares.
Jodi Leong, a spokeswoman for Ige, said the governor would not comment publicly on proposed legislation to “allow for a fair public hearing.” She said bills that have been passed go through a legal and departmental analysis before the governor himself reviews them.
Dela Cruz said it is essential to enact some of the proposed tax and fee increases to balance the $16 billion biennial budget that was just approved by the Legislature and to add money to help the elderly and the homeless.
Dela Cruz said the bad news that came March 12 from the Council on Revenues, which forecast the state’s income growth slipping to 3 percent, down from 4.2 percent in the previous quarter, pushed him to that conclusion. The state’s general fund grew only 2.1 percent in the first eight months of the year, compared to 6.9 percent for the same period in the previous year.
“Holy shit, we need this more than we thought,” he recalls thinking when he heard the latest revenue forecast.
That night, he went to a white board and began listing bills that would mean more money in state coffers. He identified about 12, one that was revenue neutral and two where possible proceeds were unknown, and he began thinking about how they would fit into the state’s budget picture.
He said he was looking for ways to increase taxes on the wealthy and avoid them for lower-income people.
His proposed estate tax increase, for example, would increase a portion of the tax on estates worth more than $10 million from 15.7 percent to 20 percent, which he says would produce about $5 million a year for the state.
It’s gotten mixed reviews.
Tom Yamachika, president of the Hawaii Tax Foundation, said it would give Hawaii one of the highest estate taxes in the nation and likely cause what he called a “brain drain” as wealthy people move away to escape it.
Jared Watumull, a scion of the Watumull real estate fortune, told lawmakers it would create an “undue hardship on small business owners and farmers and their ability to pass their business to their heirs.” He suggested instead that the state should eliminate the estate tax altogether.
But Gary Hooser, executive director of the nonprofit Pono Hawaii Initiative, said people with “eight-figure estates” can afford to spend a bit more given the widening income gap.
Dela Cruz was also at the forefront, along with WAM vice chair Sen. Gilbert Keith-Agaran and committee member Sen. Kai Kahele, as co-sponsors of a measure to tax more internet purchases, which he says would raise $4 million the first year and about $10 million annually in subsequent years.
Last year Hawaii began taxing goods bought on the internet. Senate Bill 396 would expand the tax to include goods from companies that only use firms like Amazon as what the bill defines as “marketplace facilitators.” In other words, according to Yamachika, consumers would pay sales tax not just on items they buy from Amazon itself but also from companies that use Amazon as a platform to sell their own goods.
At a media briefing last week, Luke said tax hikes are not yet being assumed as part of the proposed budget, but are being considered as “possible revenue generators.” She pointed to Airbnb operators and resort fees as good possibilities.
Senate Bill 1292 would require operators of short-term rentals to pay the transient accommodation tax, with the platforms that host the listings acting as the tax collection agent on behalf of the state. Owners who fail to register with the state Department of Taxation would face citation and monetary fines.
The hotel industry has typically opposed such measures as legitimizing vacation rentals that are often operated illegally.
Short-term rentals advertised by companies like Airbnb are controversial because they disrupt neighborhoods and reduce the stock of affordable housing, Luke said last week.
Those issues are the responsibility of the state’s counties to resolve because they are zoning problems, Luke said, but nevertheless the properties are being operated as hotels and should be required to pay the same taxes as hotels.
“We are leaving a lot of tax revenue on the table,” she said, noting that it has been estimated that the state would generate $45 million to $50 million a year if it collected the money.
Taxing short-term rentals might also make them less attractive to the operators, she said.
Luke suggested it is also time to crack down on Hawaii rental owners who have been advertising on those platforms while hiding their income from the state.
“We don’t think some of these homeowners are actually paying TAT, the transient accommodation tax,” she said.
Resort fees are controversial new charges imposed by hotels that bill customers for things they used to get for free, including in some cases towels or access to the beach, drawing criticism from the Federal Trade Commission. SB 380 would extend the transient accommodation tax that hotels in Hawaii pay to include these fees as well.
To Luke, resort fees are a new source of revenue for hotels that they should be forced to share with the state. The measure passed the House Finance Committee on Thursday.
“They don’t pay taxes on that resort fee, so we are trying to close that loophole,” she told reporters recently, adding that she believed that would bring in about $10 million a year.
Real estate investment trusts are another possible target for the Legislature. Senate Bill 301 would disallow the dividend deduction customary for properties held as securities by real estate investment trusts. Under federal law, REITs disperse their income to their shareholders, which allows them to avoid corporate tax in the locations of their properties, although shareholders pay taxes on that income in their home states or countries.
The tax changes would affect some of the state’s most prosperous industries, and the fight to block them is unfolding both in hearings and behind the scenes.
“It depends on who has the most well-connected lobbyists,” said Scott Foster, a spokesman for Hawaii Advocates for Consumer Rights, who has previously and unsuccessfully urged the state to raise taxes on REITs and Airbnb operations.
It also helps legislation if well-heeled corporations don’t oppose them. Airbnb welcomes taxes on its lodging operators; it makes it less likely that local governments will impose restrictions on their growth.
Amazon fought a bitter battle over a decade to avoid charging taxes on products it sold via the internet while its bricks-and-mortar competitors were forced to collect them. But after losing repeatedly in the courts, Amazon now says it has embraced the prospect of collecting sales taxes.
“Based on our experience in complying with similar laws in other states, we believe (the bill) will level the playing field for all retailers, an outcome that we have long supported,” said Braden Cox, Amazon’s director of U.S. state and local public policy, in testimony to the Legislature on March 15.
In both cases, of course, the taxes are actually paid by the companies’ customers.
The other proposed tax hikes include Senate Bill 395, introduced by Dela Cruz and Keith-Agaran, which would impose a conveyance tax on some short-term leases; Senate Bill 382, introduced by a group of senators including Dela Cruz, which would increase taxes tied to time-share management fees; and Senate Bill 495, introduced by Dela Cruz, which would change language in state income tax rules so that some out-of-state businesses could be subject to taxation.
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