Counter Intuitive Legislative Acts On Affordable Housing

By Lowell L. Kalapa

(Released on 4/20/08)

Last week we took a look at hurdles to producing affordable housing in Hawaii. Today, let’s take a look at the importance of thoroughly analyzing the impacts of legislation and how inadequate analysis of legislation intended to encourage affordable housing may have unintended effects.

Probably the most extreme example was the tiering of the conveyance tax to “punish” those filthy rich speculators of residential property which won’t be owner-occupied and cost more than a million dollars. Never mind that large parcels that are bought and sold with either single or multiple family dwellings that are or will be occupied by renters will pay that same high rate of conveyance tax! Who bears the burden of the higher tax? The landlord? No! The tax is ultimately borne by the poor renter. The noble attempt at providing more affordable housing resulted in perhaps the exacerbation of the problem!

Another piece of legislation still under consideration in the legislature this year appears to be a good-hearted attempt to encourage the building of community health facilities that just happen to have affordable housing as part of the development, in a transit related area. The legislation would grant a complete exemption from the general excise tax for the building and operation of such health facilities and housing.

The purpose clause of the bill seems innocent enough making a case for the fact that building such health care facilities and affordable housing in and around the transit route for Honolulu’s proposed mass transit system will insure that clients and people will have access to the transit system. But the first hint that there may be another agenda raises eyebrows when one asks why would a special exemption from the general excise tax be necessary if the community health facility is run as a nonprofit organization? Well, upon closer examination a “community health care facility” means a facility which is leased or sold to a person who is controlled by a nonprofit organization, the state, the county or any political subdivision or agency of the state or county.

As the bill provides, the exemption from the general excise tax would extend to any taxpayer or firm involved with a newly constructed or rehabilitated project that is a community health care facility within a mixed -use, transit-oriented joint development project approved by the department of health. And if one looks further to the definition of what is a “mixed-use transit-oriented joint development project,” one finds that it is a project that combines residential development with any combination of commercial and industrial development including  that of a community health care facility.

That then leads to the second question, why is the exemption only applicable to facilities that would be built and run in a transit related area or district? If such community health facilities are so important to the health and welfare of our community, why isn’t the exemption applicable to a rural community health facility that the legislature has also noted to be in scarce supply in Hawaii?

As the director of taxation pointed out, the language is so loosely drafted that it is unclear as to what the exemption would be applicable. Is it just the health care facility or would it be the combination of residential development and commercial and industrial development that would include the health care facility? Or would it be the infrastructure of which part will benefit the health care facility? Likewise, if the facility were built by the nonprofit or a government agency, the cost of the design and the construction of the facility would be subject to the general excise tax as the services of the designer and construction company would still be subject to the tax.

An exemption already exists for affordable housing that is certified by the Housing Finance Development Corporation, so it is curious why the case is being made for the proposed exemption, as affordable housing projects are already exempt. Thus, it appears that this proposal is specifically designed to exempt developments that just happen to have a health care facility and affordable housing as part of the complex as long as it is in a transit oriented development area.

Ah, but what is the real kicker is that the bill would subject these particular affordable housing projects, to the 0.5% county surcharge even though they are exempt from the general excise tax. Apparently this provision is to assuage the city’s resistence to the bill, as it would insure that the new exemption will not deny the city its take of the county surcharge.

While the intent may be to only subject these new transit related health care and housing projects, by placing the carve out to subject the projects to the county surcharge in the existing exemption for affordable housing endangers all other affordable housing projects that are not part of a transit-oriented development. With the city aware that it may not have enough money to complete the transit project, it may just ask that in the name of equity, all affordable housing projects in Honolulu pay the county surcharge. Now that would be both counter intuitive and wrong!

Lowell L. Kalapa is the president of the Tax Foundation of Hawaii. Mr. Kalapa’s commentary is printed each week in the Maui News, West Hawaii Today, Garden Isle News, and the HawaiiReporter.com.