SUBJECT: TRANSIENT ACCOMMODATIONS, REAL PROPERTY, INCOME, County Surcharge on TAT

Feb, 2021 Tax Foundation Hawaii testimony on HB1314

BILL NUMBER: HB 1314

INTRODUCED BY: YAMASHITA

EXECUTIVE SUMMARY: Authorizes each county to levy a county surcharge on transient accommodations tax if the county satisfies certain real property tax requirements. Repeals the allocation of transient accommodations tax revenue to the counties and makes conforming amendments. Establishes a residential property owner tax credit and a residential circuit breaker tax credit. Beginning with taxable years after 12/31/2021, gradually implements new individual income tax and corporation income tax brackets and rates in 3-year intervals.

SYNOPSIS: Adds a new section to chapter 46, HRS, to authorize counties to adopt a surcharge on TAT, if it meets the following conditions:

• Raise the property tax rates to no less than $5 per $1000 of assessed valuation in 2022; $7.50 in 2025; $10 in 2028; and $15 in 2031.

• Increase the home exemption for property tax to at least $_____.

• Lower the minimum age needed for the home exemption to _____.

Adds a new section to chapter 237D, HRS, regarding administration of the county surcharge on TAT.

Adds a new section to chapter 248, HRS, to provide for a “skim” of 5% of the gross collections of TAT surcharge that will be retained as State general fund realizations.

Amends section 87A-42, HRS, to delete the language mandating sequestration of the county’s share of TAT moneys if the county has not made its required contributions toward Other Post-Employment Benefits for public workers such as pensions (ERS) and health benefits (EUTF).

Amends section 237D-6.5, HRS, to delete the current provision earmarking $103 million annually to the counties.

Adds a new section to chapter 235, HRS, to allow a refundable income tax credit of ___% of the real property tax paid by a qualified taxpayer on no more than the first $1 million of valuation. That section defines “qualified taxpayer” as a resident who pays real property taxes to a county of the State for a residential property that is used as the taxpayer’s principal residence during the taxable year.

Adds a new section to chapter 235, HRS, to establish a refundable residential circuit breaker tax credit equal to ___% of the real property tax owed and paid by a qualified taxpayer. This section defines a “qualified taxpayer” as a resident who (1) Is sixty-five years of age or older; (2) Is not Re: HB 1314 a dependent of another taxpayer; (3) Has a total earned income that is less than $20,000; and (4) Owns and occupies a residential property that is used as a principal residence and the assessed value of the residential property does not exceed $1,000,000.

Amends section 235-51, HRS, to phase out the individual income tax by 2030.

Amends section 235-71, HRS, to phase out the corporate income tax by 2030.

EFFECTIVE DATE: Upon approval.

STAFF COMMENTS: This bill represents an effort to phase out the individual and corporate income taxes by changing the focus to real property and transient accommodations taxes. There are still several blanks in the bill so it is not possible to prejudge the revenue impact, but in the trying times we are now in, we expect that the proponents of this bill are eyeing a net tax increase.

A tax increase of any magnitude in Hawaii’s fragile economy will, no doubt, have a negative impact as costs soar due to higher taxes. As costs and overhead increase, employers must find ways to stay in business by either increasing prices to their customers or cut back on costs. This may take the form of reducing inventory, shortening business hours, reducing employee hours, or even laying off workers. A tax increase of any magnitude would send many companies, especially smaller ones, out of business taking with them the jobs the community so desperately needs at this time.

We observe that the two major taxes collected by the Department of Taxation are now the general excise tax and the individual income tax. According to the DOTAX’s annual report for FY2020, the GET brought in $3.44 billion; the individual income tax brought in $2.36 billion; and all other taxes combined brought in $1.65 billion. To replace the individual and corporate income taxes, the state would have to impose a whopping amount of tax just to stay even. Thus, there will be highly significant economic consequences accomplished by this bill – and most of them will need to come out of something other than the TAT, which is producing barely a trickle of income as the result of COVID-19 decimation of the hospitality industry.

HB1314: Text, Status