Letting the Genie Out of the Bottle…for Our Keiki?

by Tom Yamachika, President, Tax Foundation Hawaii

This November, voters throughout the State will be given the opportunity to vote on a constitutional amendment, brought forward by Senate Bill 2922, supposedly to fund primary school education. The amendment would give the State Legislature the power to impose a real property tax surcharge on “investment real property.”

The amendment, if approved by the voters, does not define what investment real property is. Nor does it contain any limitations on the taxing power. Almost all the details are left up to the state legislature. For constitutional provisions this is not uncommon, but if approved it would give the genie, namely the legislature, a lot more power over revenue raising than it previously had.

Last year, the teachers’ union, which was solidly behind the proposal this year, was actively pushing a proposal to do the same thing. But the union was also advancing legislation to implement the surcharge, and that legislation had some numbers in it. So, from that legislation we can try to figure out how much is at stake.

Last year’s bill, Senate Bill 686, proposed to surcharge both investment real estate and transient accommodations. It proposed to tax the real estate, if valued at $_____ or more, at $7.50 per $1000 of property value. (Yes, the amount was left blank in House Draft 1, the latest version of that bill.) Testimony that the teachers’ union submitted to the House Finance Committee said, “By levying a surcharge on residential investment properties and visitor accommodations, we can raise over $500 million each year for education without placing an unfair financial burden on local residents.” The union went on to explain the apparent targets of the bill: “Our state's high cost of housing and renting is driven by real estate speculators using the islands as their personal Monopoly board.”

Let’s suppose that the intent is to tax single- or dual-family residential properties with values over $1 million. Honolulu’s “Residential A” property category fits that description. The latest report from the Honolulu property tax office shows that Residential A properties aggregated about $17.5 billion in value. Applying a $7.50 surcharge to all of them would result in a tax take of about $131 million. Even allowing for similar properties on other islands, it’s clear that the teachers won’t even get close to $500 million without either substantially modifying the threshold at which the surcharge applies to residential properties or applying the surcharge to billions of dollars’ worth of property other than that which now comprises Residential A. After all, the constitutional language doesn’t even require that the surcharge apply only to residential realty. It can apply to any investment real property. What about shopping centers? Rental housing? Office buildings?

And even if that $500 million is raised, there are, sadly, no guarantees that any of it will end up in the classroom. About $2 billion in general fund monies are now appropriated to the Department of Education. If the real property surcharge pulls in hundreds of millions, there will be tremendous pressure on lawmakers to “repurpose” some of the $2 billion. After all, there are lots of priority projects throughout the State, such as relief for the poor and the homeless, invasive species ravaging our ecosystem, university and airport facilities in dire need of repair, roads and bridges falling apart, and the list goes on.

Given all these pressures, what’s the genie going to do if let out of the bottle? It may not simply launch a fusillade against evil real estate speculators. Others may get caught in the firestorm. And will there be a benefit to our keiki? Maybe so, maybe not. So, do we really want to open that bottle?

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