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Reject effort by state to expand its taxing power via HB1537 HD1

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the House Committee on Judiciary and Hawaiian Affairs on Feb. 8, 2024.
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Feb. 8, 2024, 2 p.m.
Hawaii State Capitol
Conference Room 325 and Videoconference

 To: House Committee on Judiciary & Hawaiian Affairs
       Rep. David A. Tarnas, Chair
       Rep. Gregg Takayama, Vice-Chair

From: Grassroot Institute of Hawaii
          Ted Kefalas, Director of Strategic Campaigns

RE: TESTIMONY IN OPPOSITION TO HB1537 HD1 — PROPOSING AMENDMENTS TO ARTICLES VIII AND X OF THE CONSTITUTION OF THE STATE OF HAWAII TO AUTHORIZE THE LEGISLATURE TO ESTABLISH A SURCHARGE ON RESIDENTIAL INVESTMENT PROPERTY TO INCREASE FUNDING FOR PUBLIC EDUCATION.

Aloha Chair Tarnas, Vice-Chair Takayama and other members of the Committee,

The Grassroot Institute of Hawaii would like to offer its comments opposing HB1537 HD1, which proposes amending the state Constitution in order to facilitate a state property tax on homes that are valued at $3 million or greater and are not the owner’s primary residence.

The stated purpose of this proposal is to “increase funding for public education for all students of Hawaii,” but that does not erase the fact that this would be a dramatic break with historical precedent regarding Hawaii’s property tax system and its method of funding public education.

There is a reason that the Hawaii Constitution bars the state from levying property taxes, making it the exclusive domain of the counties and a significant element of the county budget. Inserting state taxation into this scheme would frustrate that intent and opens the door to yet more state capture of county revenues.

As with any proposed tax increase, HB1537 threatens to increase the cost of living in Hawaii, as well as add to the burden of Hawaii homeowners at the very time our counties are searching for ways to offset soaring property taxes due to increased valuations.

The bill’s proponents might believe that limiting the tax to homes valued at $3 million or more will not affect average homeowners, but in fact, the effects of a tax hike cannot be segregated from the rest of the economy. What affects one segment of the housing market will ripple through the state’s housing market as a whole.

For example, the proposed tax surcharge could incentivize the purchase and construction of housing under the threshold, creating a domino effect that would reduce housing availability and affordability in this “middle” tier.

Furthermore, with land-use, zoning and other regulations continuing to throttle Hawaii homebuilding — leaving Hawaii with a massive housing shortage and no prospect of a building boom any time in the near future — one should not assume that a $3 million home will remain a high-value investment property in Hawaii rather than a slightly-above-average or even median-cost home.

That might seem to be a stretch, but few people thought that Hawaii’s median price would soon reach even $1 million when Honolulu County established its tiered Residential A property tax classification for tax year 2018, with properties valued above $1 million facing a higher tax rate.[1]

Now, that Residential A category encompasses many Oahu homes, with political pressure building to increase the threshold or abolish the tax category completely.[2]

Over time, the $3 million threshold envisioned in this bill could cease to be a high-value investment category and instead become a burden to more and more homeowners, which in turn could affect rental prices and increase the cost of housing in Hawaii.

Looking at the broader picture, one must consider that tax increases in general are not a good idea for Hawaii’s economy, especially not now when it already has one of the highest tax burdens in the nation.[3]

Consider these points:

>> Hawaii’s population has been declining for the past six years.[4] Tens of thousands of Hawaii residents have moved to the mainland over the past six years — mainly to states without income taxes, such as Washington, Nevada, Texas and Florida.[5] Their departure from the islands is not only emotionally distressing, but economically depressing as well.

>> Fewer people remaining means fewer people to work at our private businesses, or even staff our government agencies. It also means fewer people to help pay for Hawaii’s ever-increasing tax burden.

>> Higher taxes for those who remain is more fuel for the exodus of our friends, neighbors and family to places that are more affordable. It’s a downward spiral economically fostered by the relentless upward spiral of more and more taxes.

>> To put our tax system in context, Hawaii taxes high-income earners at 11%, second only to California at 13.3%.[6] Hawaii’s top 1.5% of taxpayers already pay 34.9% of all income taxes in the state.[7]

>> Hawaii is suffering from a stagnant economy, and both the Economic Research Organization at the University of Hawai‘i[8]  and the state Department of Business, Economic Development and Tourism[9] have predicted continued slow economic growth in 2024. Tax hikes could exacerbate this slowdown, since entrepreneurs will be less likely to want to invest their capital — or “wealth assets,” as the case may be[10] — in Hawaii’s economy.

In short, Hawaii’s residents and businesses need a break from new taxes, tax increase, fees and surcharges. The last attempt to amend the Hawaii Constitution to allow for state property taxes ended in a lawsuit and a poor showing at the polls.

Meanwhile, Hawaii residents are “voting with their feet” to flee the state’s high taxation. This is not the time to make Hawaii a more expensive place to live and do business.

Thank you for the opportunity to submit our comments.

Sincerely,

Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii
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[1]Real Property Tax Rates in Hawaii, Fiscal Year July 1, 2017 to June 30, 2018,” Real Property Assessment Division, Department of Budget and Fiscal Services, City and County of Honolulu, accessed Feb. 20, 2022.
[2] Jim Howe and Linda Howe, “Blangiardi, Kiaaina Must Act On ‘Residential A’ Property Taxes,” Honolulu Civil Beat, Jan. 5, 2023.
[3] Jared Walczak and Erica York, “State and Local Tax Burdens, Calendar Year 2022,” Tax Foundation, April 7, 2022.
[4] Maria Wood, “Where People from Hawaii Are Moving to the Most,” 24/7 Wall Street, Jan. 23, 2022.
[5] Katherine Loughead, “How Do Taxes Affect Interstate Migration?” Tax Foundation, Oct. 11, 2022.
[6] Timothy Vermeer, “State Individual Income Tax Rates and Brackets for 2023,” Tax Foundation, Feb. 21, 2023.
[7]Hawaii Individual Income Tax Statistics,” Hawaii Department of Taxation report for Tax Year 2021, August 2023, Table 12A.
[8] Carl Bonham, Byron Gagnes, Steven Bond-Smith, et al., “State Facing Headwinds as Maui Recovery Begins,” Economic Research Organization at the University of Hawai‘i, Dec. 15, 2023.
[9] Hawaii Department of Business, Economic Development, and Tourism, “Hawaii Economic Growth Remains Low for 2024 as Recovery Continues,” Dec. 11, 2023.
[10] Aaron Hedlund, “How Do Taxes Affect Entrepreneurship, Innovation, and Productivity?” Center for Growth and Opportunity at Utah State University, Dec. 23, 2019; Ergete Ferede, “The Effects on Entrepreneurship of Increasing Provincial Top Personal Income Tax Rates in Canada,” Fraser Institute, July 10, 2018; Robert Carroll, Douglas Holtz-Eakin, Mark Rider and Harvey S. Rosen, “Personal Income Taxes and the Growth of Small Firms,” National Bureau of Economic Research, October 2000.

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