Proposed tax hike could further destabilize insurance market

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration on April 5, 2024, by the Senate Committee on Ways and Means, and Senate Committee on Judiciary.

April 5, 2024, 10:15 a.m.
Hawaii State Capitol
Conference Room 211 and Videoconference

To: Senate Committee on Ways and Means
      Sen. Donovan M. Dela Cruz, Chair
      Sen. Sharon Y. Moriwaki, Vice-Chair

      Senate Committee on Judiciary
      Sen. Karl Rhoads, Chair
      Sen. Mike Gabbard, Vice-Chair

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


Aloha Chairs, Vice-Chairs and other members of the committees,

The Grassroot Institute of Hawaii would like to offer comments on HB2686 HD1 SD1, which would create a new transient accommodations tax rate for transient vacation rentals and a conveyance tax surcharge.

Both new taxes are intended to help fund the stabilization of property insurance for certain categories, especially in which premiums have gone up sharply in response to increased risk and the need to mitigate that risk through building maintenance or new equipment and protocols.

We are deeply concerned that this measure, despite its good intentions, would further distort Hawaii’s insurance market. Rather than incentivizing property owners to mitigate risk themselves, it promises that the government would help delay the cost of that risk and places the burden of that cost onto others.

The bill envisions a five-year limit for condominium insurance under the plan, but there would be no similar limit placed upon the tax increases. This suggests that we are looking at a permanent tax increase and insurance subsidy.

Under such circumstances, there would be little incentive for covered buildings to ensure that their problems are resolved in that time period when they could more easily lobby for an extension of the time limit. Having come to the rescue of these vulnerable groups once, the Legislature would doubtless have difficulty not doing so again.

In fact, this creates a moral hazard, wherein more and more building owners might opt to avoid maintenance and upgrade costs that would help mitigate their high insurance rates because it would be reasonable to believe that the Legislature and taxpayers would come to the rescue.

An additional problem is that there would be no clear nexus between the benefit of insurance stabilization and the source of the funding for that benefit — tourism and conveyance taxes — which would violate state law governing special funds.

Moreover, given the blank amounts and the unknown costs of this program, one cannot properly estimate the budgetary impact of this proposed program or the tax increase.

It is fundamentally unfair to the public to consider and pass “blank” tax increases. The people have a right to know the size of the tax increase or cut under consideration.

However, we will assume that these blanks, however inadvisable, represent a moderate to sizable tax increase. In that case, we must caution that the tax hikes in this bill will be harmful to Hawaii homebuyers and businesses.

For example, regarding the conveyance tax surcharge, 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, a conveyance tax surcharge 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]

Meanwhile, a hike in the TAT would fall not only on tourists, but also Hawaii residents who travel interisland, for whatever reason, or even just want to stay at a local hotel for a “staycation.”

More to the point, a large body of research demonstrates that increasing taxes on tourists can affect both the competitiveness of Hawaii’s tourism industry and the health of local businesses that depend upon tourism dollars — which means the tax affects most, if not all, Hawaii residents, albeit in some cases indirectly.

A 2017 European Union study on the impact of taxation on tourism in Europe found that high tourism taxes, passed on to tourists through higher prices, affected the competitiveness of particular destinations.[4] Coastal and leisure destinations in particular were most adversely affected by increases in tourism taxes, especially compared to locations that were more focused on business travelers.

In addition, occupancy taxes such as Hawaii’s TAT were singled out as inequitable and especially frustrating to tourists. The EU study recommended that countries that depend heavily on tourism should reduce their tourism taxes in order to increase competitiveness.

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.[5] Consider these points:

>> Hawaii’s population has been declining for the past six years,[6] 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.[7] 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%.[8] Hawaii’s top 1.5% of taxpayers already pay 34.9% of all income taxes in the state.[9]

>> Finally, Hawaii is suffering from a stagnant economy, and both the Economic Research Organization at the University of Hawai‘i[10]  and the state Department of Business, Economic Development and Tourism[11] 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[12] — 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.

If the Legislature wishes to help address problems in the insurance market, they should not rely on special funds and taxes as the mechanism to do so.

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] PricewaterhouseCoopers LLP, “The Impact of Taxes on the Competitiveness of European Tourism,” European Commission, Directorate-General for Internal Market, Industry, Entrepreneurship and SMEs, October 2017.
[5] Jared Walczak and Erica York, “State and Local Tax Burdens, Calendar Year 2022,” Tax Foundation, April 7, 2022.
[6] Maria Wood, “Where People from Hawaii Are Moving to the Most,” 24/7 Wall Street, Jan. 23, 2022.
[7] Katherine Loughead, “How Do Taxes Affect Interstate Migration?” Tax Foundation, Oct. 11, 2022.
[8] Timothy Vermeer, “State Individual Income Tax Rates and Brackets for 2023,” Tax Foundation, Feb. 21, 2023.
[9]Hawaii Individual Income Tax Statistics,” Hawaii Department of Taxation report for Tax Year 2021, August 2023, Table 12A.
[10] 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.
[11] Hawaii Department of Business, Economic Development, and Tourism, “Hawaii Economic Growth Remains Low for 2024 as Recovery Continues,” Dec. 11, 2023.
[12] 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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