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SB2044 SD2 HD1 could backfire on realty market

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the House Committee on Consumer Protection and Commerce on March 18, 2024.
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March 18, 2024, 2:05 p.m.
Hawaii State Capitol
Conference Room 329 and Videoconference

To: House Committee on Consumer Protection & Commerce
      Rep. Mark. M. Nakashima, Chair
      Rep. Jackson D. Sayama, Vice-Chair

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

RE: TESTIMONY OPPOSING SB2044 SD2 HD1 — RELATING TO THE CONTROLLING INTEREST TRANSFER TAX

Aloha Chair Nakashima, Vice-Chair Sayama and other Committee members,

The Grassroot Institute of Hawaii would like to offer its comments opposing SB2044 SD2 HD1, which would extend the state conveyance tax to include the transfer of a controlling interest of an entity with real property located in the state.

Put simply, this is a complex bill that seeks to expand the scope of the conveyance tax to include business transactions, presumably in the hopes of generating sizable tax revenues.

Assuming that the headaches associated with administration and collection of this tax are not enough to give the Committee pause, there is reason to be concerned about the effect it could have on Hawaii business and real estate.

Even when applied directly, transfer taxes can have a negative impact on the economy. A report by the Sage Policy Group noted that high transfer taxes can “lead to decreases in population, real incomes, real estate transactions, investment in structures, and quality of the built environment.”[1]

The same report added that transfer taxes are not a reliable source of tax revenues, and are particularly volatile in areas with especially high tax rates.[2]

In the case of this bill, those negative features of the conveyance tax are compounded by the fact that it would create complications and disincentives for the transfer or restructuring of local businesses. Thus, it would act as yet another burden on Hawaii businesses, discourage investment and hinder economic growth.

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] with tens of thousands of Hawaii residents moving to the mainland — and 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 in Hawaii means fewer people to work at our private businesses, or even staff our government agencies. It also means fewer people to 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 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%.[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. This is not the time to make Hawaii a more expensive place to live and do business.

Hence our opposition to this proposal to extend the state conveyance tax to include the transfer of a controlling interest of an entity with real property located in the state.

Thank you for the opportunity to testify.

Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii
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[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]The Unintended Consequences of Excessive Transfer Taxes,” p. 2.
[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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