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Obtuse Legislation Takes Shape at Capitol

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By Lowell L. Kalapa

As we pass the halfway mark in the 2005 session of the legislature, it is becoming increasingly apparent that lawmakers truly have no concern for the poor taxpayer’s pocket book.
Probably the most disgusting piece of legislation that had to be killed because it caused such a public uproar as it would have robbed taxpayers of even more dollars was the Senate proposal to raise the general excise tax to 5% under the guise that a portion of the proceeds was to be used to fund a transit system for Honolulu and public transportation projects for the Neighbor Islands. Lawmakers also hoped that they could pacify constituents by promising to use the residual money from the increase for tax relief. This latter proposition was a rerun of the 1998 Economic Revitalization Task Force that promised income tax relief if only the general excise tax rate could be raised.
Then there are the efforts to address the issue of affordable housing. Lawmakers want to earmark 10% of the general excise taxes collected on residential rents and use that money for affordable housing while exempting developers of affordable housing from the general excise tax on those projects. But the real kicker is that they want to raise the conveyance tax on the “so-called” homes of the wealthy because to raise it on all transactions would upset their constituents.
On the House side the tax rate would rise from 10 cents per hundred dollars of value transferred where the purchaser intends to occupy the home, to 20 cents for property valued between $600,000 and $1 million. Then it jumps to 30 cents per hundred dollars of value for properties over $1 million in value. If the purchaser of the property doesn’t intend to occupy the property, the rate starts at 20 cents per hundred dollars of value and rises to 30 cents for properties over $600,000 to $1 million and then to 40 cents for properties over $1 million.
On the Senate side, the amounts of the conveyance tax are left blank in the latest version, but the drafting indicates different rates would kick in at $500,000 of value and another rate for properties valued greater than $1 million.
The problem with this is, first, who knows where the value of residential real property will go as we have seen the median price of homes on Oahu jump from the high $200,000 level to well over half a million dollars while median prices on the Neighbor Islands have jumped just as fast or faster than Oahu. Second, both measures ignore the fact that new residential developments usually start with the purchase of raw land which is then subdivided into house lots. That raw land may cost millions of dollars and under these proposals would be subject to the higher conveyance tax rates which in turn will be passed on to what may be an affordable housing buyer. The higher tax rate would also apply to nonresidential properties like shopping centers and stores.
And while on the subject of affordable rental housing, who do lawmakers think builds rental housing? It is investors who take the risk to build that rental housing and usually in multiple units so that the return on the investment is positive rather than negative. Such rental housing units will run into millions of dollars, all of which will be subject to the punitive higher conveyance tax rate.
Affordable housing advocates like to point out that Hawaii has amongst the lowest conveyance tax rates in the nation. What they don’t acknowledge is that the values against which those rates are applied are amongst the highest in the nation. What they also don’t acknowledge is that Hawaii’s conveyance tax was never meant to be a source of operating revenue, rather it was a tool that provided real property assessors with information about the value of properties purchased or sold to help with the assessment process for the real property tax.
Even more appalling is the fact that once again, lawmakers believe that the only solution to solve the affordable housing challenge is to throw more money at the problem. Unfortunately, they seem to ignore that it is both state and county government that has helped to insure that affordable housing remains out of the reach of many potential homeowners because it is government that has exacted an in-lieu tax called regulation that not only adds to the cost of housing in Hawaii but makes it increasingly difficult to build affordable housing.
Instead of improving the prospects for affordable housing, lawmakers are making the situation worse by raising taxes so that they can throw money at the problem.

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