Conveyance tax hikes aimed at wealthy would hurt all

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the Senate Committee on Agriculture and Environment on March 19, 2024.

March 19, 2024, 1 p.m.
Hawaii State Capitol
Conference Room 225 and Videoconference

To: Senate Committee on Housing
      Sen. Stanley Chang, Chair
      Sen. Troy N. Hashimoto, Vice-Chair

      Senate Committee on Water and Land
      Sen. Lorraine R. Inouye, Chair
      Sen. Brandon J.C. Elefante, Vice-Chair

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


Aloha Chairs and other members of the committees,

The Grassroot Institute of Hawaii would like to offer comments in opposition to HB2364 HD2, which would amend the conveyance tax by creating four new taxation rate tiers for property valued over $14 million, as well as a new classification and tax rates for multifamily residential properties.

Unfortunately, it is difficult to effectively address the economic impact of a tax bill that does not include the amounts of the proposed new rates. Previous versions of this bill mentioned several sizable increases, leaving us to assume that the final version of this bill, if enacted, will still feature a significant conveyance tax increase, whether for all levels of property or only for multi-million dollar homes

The previous version had proposed increasing taxes on properties valued between $6 million and $10 million by more than 20%; and on properties valued between $10 million and $14 million by 40%. It also had proposed new tiers that doubled, tripled, quadrupled and sextupled the tax for higher-valued properties.

If the amounts in the final version are anywhere near these amounts, even for homes well out of the average range for homes in Hawaii, they still would pose a threat to all Hawaii residents.

The creation of a new set of conveyance tax tiers for multifamily residential properties possibly could encourage the construction of multifamily housing. However, this would not be not enough to mitigate the potential harm from a large increase in the conveyance tax.

Put simply, higher conveyance taxes would harm the economy. A report by the Sage Policy Group on transfer taxes noted that such laws can “lead to decreases in population, real incomes, real estate transactions, investment in structures, and quality of the built environment.”[1]

When applied to higher-value properties, transfer taxes reduce investment in both commercial and residential properties, leading to lost jobs and reduced economic activity.

Further, this measure might discourage adaptive reuse — the conversion of old buildings to new purposes. Hawaii’s counties can leverage adaptive reuse to add to their housing stock, as they are doing now,[2] but higher conveyance taxes could chill the sale of old buildings, which may not necessarily qualify as “multifamily residential property” at the time of sale.

The Sage report stated: “Many properties will need to be upgraded and/or adaptively reused to remain viable. Excessive transfer tax rates can frustrate the exchange of property that is often required to return to commercial viability.”[3]

Looking at the even 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.[4] Consider these points:

>> Hawaii’s population has been declining for the past six years,[5] with tens of thousands of Hawaii residents moving to the mainland over the past six years — mainly to states without income taxes, such as Washington, Nevada, Texas and Florida.[6] 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 the residents who still live here is more fuel for the exodus of talent and capital — 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.

>> Hawaii taxes high-income earners at 11%, second only to California at 13.3%.[7] Hawaii’s top 1.5% of taxpayers already pay 34.9% of all income taxes in the state.[8]

>> Finally, Hawaii is suffering from a stagnant economy, and both the Economic Research Organization at the University of Hawai‘i[9]  and the state Department of Business, Economic Development and Tourism[10] 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[11] — in Hawaii’s economy.

In short, Hawaii’s residents and businesses need a break from new taxes, tax increase, fees and surcharges. This is not the time to make Hawaii a more expensive place to live and do business. Even when applied to a limited number of properties, a dramatic increase in the conveyance tax would have a negative effect on the state’s economy.

Thank you for the opportunity to testify.

Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii

[1]The Unintended Consequences of Excessive Transfer Taxes,” Sage Policy Group, Inc. on behalf of the Community Coalition for Jobs and Housing, June 2022, p. 3.
[2] Lana Teramae, “Local Architects Talk About Repurposing Existing Buildings in Post-Pandemic Hawai‘i,” Hawaii Business Magazine, Sept. 6, 2021.
[3]The Unintended Consequences of Excessive Transfer Taxes,” p. 3.
[4] Jared Walczak and Erica York, “State and Local Tax Burdens, Calendar Year 2022,” Tax Foundation, April 7, 2022.
[5] Maria Wood, “Where People from Hawaii Are Moving to the Most,” 24/7 Wall Street, Jan. 23, 2022.
[6] Katherine Loughead, “How Do Taxes Affect Interstate Migration?” Tax Foundation, Oct. 11, 2022.
[7] Timothy Vermeer, “State Individual Income Tax Rates and Brackets for 2023,” Tax Foundation, Feb. 21, 2023.
[8]Hawaii Individual Income Tax Statistics,” Hawaii Department of Taxation report for Tax Year 2021, August 2023, Table 12A.
[9] 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.
[10] Hawaii Department of Business, Economic Development, and Tourism, “Hawaii Economic Growth Remains Low for 2024 as Recovery Continues,” Dec. 11, 2023.
[11] 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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