HB2748

by Andrea Carr, CPA, Special Correspondent, and Tom Yamachika, President, Tax Foundation Hawaii

House Bill 2748, which will become law soon, is sometimes referred to as the “Bob Nakata bill” after the former legislator, now reverend, who was one of the bill’s champions. It aims to advance the goal of providing “affordable housing” in our island state.

One part of the bill appropriates $200 million to the Rental Housing Revolving Fund, which, according to the law establishing the fund, is for grants and loans to developers creating affordable housing. A report of the administering agency, the Hawaii Housing Finance and Development Corp., states that in calendar year 2016 the agency doled out $29 million in grants, and made no loans because of “excessive errors and incomplete responses” in the loan applications that it received that year. In any event, it does not look like this fund is aptly named because revolving funds are supposed to be financially self-sustaining, which is difficult when the fund pays out millions of dollars where there is no clear expectation that the agency will get any of it back. So it appears that this $200 million, or most of it, is headed out the door with no visible means of getting it back.

But that wasn’t the costliest part of the bill. The bill also extends the general excise tax exemption for affordable housing projects from 2022 to 2030, and increases the annual aggregate general excise tax cost cap for all projects certified by HHFDC from $7 million to $30 million. The general excise tax exemption can be claimed by nearly any vendor involved in the planning or construction of the project, so the exemption totals add up quickly.

The bill also adds an anti-discrimination provision for participants in Section 8, a federal program where low income participants have part of their rent paid by the program.

If the general excise tax provision lasts until 2030 (as we know in politics, nothing is certain), then this part of the bill is projected to cost more than $300 million in lost revenue.

The issue with expanding the general excise tax exemption is you erode the general excise tax base. The tax base refers to the aggregate value of transactions the tax can be assessed on. General excise tax is assessed on almost every business transaction and because it covers so many types of transactions, the tax rate can be kept relatively low (4%) compared to other states with a sales tax or something similar to one.

While affordable housing seems like a noble cause, creating any exemption from general excise tax erodes the tax base. Any exemption which puts one cause on an unequal footing from another cause results in winners and losers. So while an exemption for being a vendor in an affordable housing seems like a worthy cause, what makes it nobler than selling life-saving prescription drugs to a hospital? General excise tax is assessed on the latter. To put it another way, exemptions in the tax code create a kind of discrimination. The favored businesses or causes don’t have to pay the tax, and the rest of us have to shoulder the costs of government that the favored businesses otherwise would have paid.

This is why many tax policy analysts favor a broad base and a low rate. This type of tax costs less for most of us, is easier to enforce, and does not create this feeling of inequity among taxpayers. Indeed, one reason why our GET has a very low rate is because it’s extremely broad, much more so than in any other state.