The Case for Conveyance Tax Hikes
by Tom Yamachika, President, Tax Foundation Hawaii
We have recently passed the halfway point in the current legislative session. Many of the more outlandish or ruinous tax proposals have fallen by the wayside. Many tax proposals remain, mainly having to do with tax relief or credits. There are, however, a few tax hike proposals still moving.
In many of the past sessions, there have been proposals to hoist the conveyance tax, which is applied when real property changes hands. In the current session, Senate Bill 362 proposes to double the tax on residential property, selling for at least $2 million, for which the purchaser is ineligible for a home exemption on property tax. The maximum tax rate under that proposal would be $2.50 per $100 of sales price.
The conveyance tax had its humble beginnings in 1966, where Act 10 imposed the tax at 5 cents per $100 of sales price. It remained at that rate until Act 195 of 1993 raised it to 10 cents per $100. The tax was raised in 2005 and 2009 to the level today. Also, earmarks were attached to the tax. Today, 10% of the tax, up to $5.1 million, goes directly to the land conservation fund, and half of the tax, up to $38 million, goes to the rental housing revolving fund. The rest of the tax goes to the general fund.
Now, let’s take a look at one prominent proponent of conveyance tax hikes and its case, in a January 2023 blog post.
The real estate industry is one of the few sectors of our economy that has been doing well in spite of the pandemic and other economic challenges. People who own property have seen the equity value of their property increase by huge amounts over the past decade. However, our real estate sales tax policy has rates that are so low that:
- They do not deter investors from using the real estate market to make a quick buck buying up the housing supply and, in some cases, flipping homes, driving up the cost of housing for locals; and
- The revenue collected by the state from this tax is insufficient to make real progress on either affordable housing development or effective resource conservation efforts.
By adjusting the real estate sales tax rates and lifting arbitrary caps on the amount of revenue going to affordable housing and conservation efforts, we can lower the cost of housing for residents without significantly impacting the average middle class local homeowner should they choose to sell.
First, is there something wrong with doing financially well despite the pandemic so as to merit (or demerit) a tax hike? The article seems to then call out people who have seen their equity in property increase over a decade, namely long-term investors, but then asserts that the tax is needed to deter short-term investors who presumably drive up prices by flipping properties. So, who do we need to deter, long-term or short-term? Or are we just opposed to all investment?
Next, the article does not at all mention the existing capital gains tax, which would seem to address both “make a quick buck” investors and those who have built up gains over time. The conveyance tax, of course, taxes neither the long-term gains nor the quick buck. It is imposed on the full value of the property being sold, so it is less of a fit with the problems of which the article complains.
Then, the article argues that the revenue from the tax is not sufficient to fund either affordable housing development or conservation efforts. But nobody ever said that one tax was supposed to solve those problems by itself. The tax feeds special funds as well as the general fund. The Legislature can, should, and does appropriate general fund money to deal with these issues. Legislators put the cap on the special fund earmarks because:
by establishling maximum amounts to be distributed to various non-general funds from the conveyance tax, this measure will make forecasts of general fund revenues more reliable, will increase legislative oversight of agencies and programs supported by the non-general funds, and will subject those agencies and programs to competition for limited public funds if the agencies or programs want more than the amount automatically distributed to their non-general funds.
Conf. Comm Rep. No. 156 (2015). We think that special funds obscure transparency in government and need to be avoided for that reason.
Finally, we doubt the conclusion that a tax increase can lower the cost of housing for residents without significantly impacting an average local homeowner who chooses to sell. Tax increases, by taking money out of private transactions for the government, cause the costs in those transactions to go up, not down. Those additional costs cause secondary effects, like price increases being reflected in the tax assessed value of other properties in the area when it comes to property tax.
Let the debate continue! There is no wrong or right answer here, just weighty policy questions to be considered by our elected leaders.