Proposed State Improvement Surcharge

by Tom Yamachika, President, Tax Foundation Hawaii

In the past few legislative sessions, there always had been one or two proposals to raise taxes in a big way. Some of them got pretty far along the road to becoming law, and some of them actually became law.

You might recall that in 2017, Act 107 permanently reinstated the “temporary” 9%, 10%, and 11% income tax brackets that we thought we got rid of in 2016. In 2018, a proposed constitutional amendment to allow the State to surcharge the counties’ real property tax made it to the general election ballot, only to be voided by the Hawaii Supreme Court in the eleventh hour. In 2019, Act 3 hoisted the top rate of our estate tax to 20%, tying Washington state for the highest estate tax rate in the country.

So what’s in store for 2020?

House Bill 1990 starts off by saying this: “The legislature finds that the department of education faces educational infrastructural issues caused by overcapacity and underfunding, while the highways division of the department of transportation faces a threat of inundation and damage to the state highway system caused by climate change as well as transportation infrastructural issues related to overcapacity and underfunding. The legislature also finds that certain state funds will need an additional, temporary source of moneys in the future.”

The bill then goes on to establish a “State improvement surcharge” in the General Excise Tax Law. It’ll be half a percent, and it’ll be for five years. The bill now says the surcharge will be imposed between 2031 and 2035…but I have a sneaking suspicion that the overall grand plan is for those numbers to change. Maybe from 2021 to 2025, at least to start.

And, lest we forget, “temporary” tax increases have a way of making themselves anything but temporary. Those who remember 1986 might remember the birth of the Transient Accommodations Tax. It was supposed to be only 5%, and only to fund construction of the Hawaii Convention Center. It’s now 34 years later, the rate is 10.25%, and the fund distribution section of the tax (section 237D-6.5, HRS) has more ornaments than a Christmas tree, funding tourism marketing, payments to the counties, the Turtle Bay easement purchase, and scads of other things.

That isn’t the only example; the 9%, 10%, and 11% income tax brackets I spoke of earlier were enacted in 2009. Those also were supposed to last five years, starting in 2010 and ending in 2015. The rates did indeed sunset, and we were free of them in 2016, but that is where the holiday ended.

The State improvement surcharge also has a Christmas tree feel to it, because the money from the tax is supposed to fix our aging school buildings, repair our washed-out highways and byways, pay down interest on our state’s borrowings on the bond market, pay pensions and benefits for state retirees, and fatten our reserve fund for hurricanes so we’ll be ready just in case one hits.

Sound like a tall order? A half percent increase in the GET, which is what this is, can be expected to produce 250-300 million dollars each year it is in effect. Those are some serious dollars! And then, five years down the road, people will have gotten used to paying the tax and legislators will have gotten used to spending the money – and if that’s what happens, the likelihood of the “temporary” tax increase becoming a permanent tax increase ticks up, higher and higher.

Is this what we want? Is this how we count on our lawmakers to spend the people’s money wisely? Already we see lots of folks throw up their hands, pack their bags, and leave. What fate is to befall the rest of us who stay here and now have to make up for the taxes that otherwise would have been paid by former Hawaii residents taking up residence in Nevada? California? Washington? Colorado? If this is not what you want, now is a good time to let your voice be heard.

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HB1990: Text, Status