What Were They Thinking?

by Tom Yamachika, President, Tax Foundation Hawaii

It’s now 2024 and a new session of the Hawaii Legislature is upon us.  The deadline for introducing bills for consideration by the Legislature has passed, and the process to separate the wheat from the proverbial chaff has begun.

In this week’s column, we will look at a handful of the bills that have been introduced.  We’ve picked them because they leave you either with a feeling of pure dread or a quizzical feeling of “What in the heck were they thinking?”

Let’s start with HB 2734, which is definitely in the latter category.  It’s a bill to modify the capital gain rates in our income tax law.  Now, individuals pay a top capital gains rate of 7.25%, and corporations pay 4%.  The bill would change this for nonresidents, foreign individuals, and foreign corporations.  The bill drafters apparently wanted to impose the tax at 39% for capital gains earned by nonresidents – take that, you suckers – but saved the real devastation for capital gains earned by foreign individuals or corporations, which they wanted to set at 150%.  One hundred fifty percent.  For them, the tax would wind up being more than the amount of gain. 

The way that bill would actually work, though, is that it would tax such gains at the maximum individual or corporate rate depending on who the taxpayer is.  As written it would never kick in with an actual 150% tax rate.  But it is blatantly unconstitutional anyway.

One of the bills in the make-you-shudder category is HB 2686, “Relating to the Stabilization of Property Insurance.”  It recites that the market for property insurance has become tighter and tighter, with an increasing number of insurers declining to write coverage in Hawaii.  The answer the bill provides is to hike the transient accommodations tax, hike the conveyance tax, reinstitute and reestablish special assessments of insurers to capitalize the Hawaii Hurricane Relief Fund (which, by the way, has $186.7 million just sitting there, as we wrote about before).  The tax hikes are now indicated by a blank, or several blanks.  We as taxpayers have no idea how much of a tax hike the legislators are considering and neither do the folks at the Department of Taxation who prepare revenue estimates for proposed legislation.  Can’t do those estimates if the tax rate is blank!

HB 2629 and SB 3005 are give-and-take bills.  Under current law, there are two rate schedules for the conveyance tax.  One goes from 0.15% to 1.25%, depending on value, for the sale of a condominium or single-family residence for which the purchaser is ineligible for a county homeowner’s exemption, and the other, for all other taxpayers, goes from 0.10% to 1.00%.  The bill would get rid of both schedules and give us just three tax rates:  0.5% for properties under $2 million; 4.0% for properties between $2 and $10 million; and 6.0% (yes, almost five times the original maximum rate) for properties valued at more than $10 million.  The bill would establish the Homeless Services Fund and feed it with lots of the extra tax collected, as well as maintaining the earmarks now placed on that tax.

New taxes for which bills have been simmering in the legislature for a while include the carbon tax (HB 2178 and SB 2525) and the road usage charge (HB 2494 and SB 3183).

No one is safe, folks!  Hold on to your wallets!