Low Real Property Tax Is a Bad Thing?

by Tom Yamachika, President, Tax Foundation Hawaii

One of the more interesting bills still alive and being considered this session, is one that would commission a study on the effects of Hawaii’s low real property taxes.

Excuse me? Low taxes are a concern?

The bill, HB 1735, attempts to explain why in its preamble section:

“The legislature finds that Hawaii has the lowest property taxes in the nation.  Although this makes sense for low- and middle-income residents who own an average single-family home, this causes the counties to potentially forego additional tax revenue from high-value homes and second homes.

“The legislature further finds that many individuals and families who spend time in Hawaii are owners of high-value properties and do not pay state income tax, instead maintaining resident status in another state with a lower income tax rate.  However, these individuals still use Hawaii's infrastructure and services, and thus should pay their fair share.

“The legislature also finds that low property taxes can incentivize development of high-end, high-value properties, contributing to the high cost of land in Hawaii, driving up the cost of living and exacerbating our affordable housing and homelessness issues.”

The conventional wisdom as to why Hawaii has low real property taxes is that most other states provide schools at the city or county level, requiring them to be funded by a municipal funding source like a property tax. Hawaii has a state-run school system, which is funded by state funding sources like the income tax and the GET.

The bill bemoans the low property taxes and portrays the counties as suffering because they are forgoing tax revenue. But the counties set property tax rates by ordinance and look at rate levels during every budget cycle. Honolulu and Kauai, for example, enacted major changes to their property tax systems in 2013. If the counties are forgoing revenue, they are doing it by their own choice.

The bill casts aspersions on nonresidents, asserting they don’t pay their fair share in income tax. Our income tax, however, is like the tax systems in most other states. Nonresidents get taxed on income with its source in Hawaii. Residents get taxed on income regardless of source BUT get a credit for tax paid to another state or country on income that has its source in that state or country. So a taxpayer’s tax, resident or not, depends on where the income comes from and whether other jurisdictions are also taxing it. If that system fails to tax people fairly, why do most states with an income tax use it?

The bill also asserts that low property taxes lead to development of high-end properties that then drive up the cost of land and therefore the cost of living. So the remedy for this is higher taxes which can and do drive up the cost of living by themselves? Come on, folks. Land costs more because we’re on an island in paradise. Folks are willing to pay decent money to live here part of the time even if they might not want to live here permanently. Indeed, our tourism authority actively encourages potential tourists to come here. So property is going to cost more here than the same square footage in places where transient rental is less of a factor.

Perhaps a more logical explanation for the debate here is contained in the testimony of HSTA, the teachers’ union, in support of the bill: “All options for generating revenue must be on [the] table, in our view, including the possibility of hiking or imposing a surcharge on property taxes to strengthen our children’s future.”

We look forward to continuing the conversation.

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