On February 28, I was in a hearing in the Senate money committee, testifying on a bill. The bill sought to amend what those in the real estate industry know as “HARPTA,” a law that requires people who buy Hawaii real estate from a nonresident seller to withhold 5% of the gross purchase price and pay it over to the Department of Taxation, as a way of making sure that the seller’s capital gains tax gets paid. The bill, SB 508, would raise the withholding rate from 5% to 9%.
“This feels like Groundhog Day,” I said. “It wasn’t that long ago that I was before this same committee testifying on a very similar bill on the very same tax provision, seeking to do the very same thing.”
It was true. On January 29th, the same Senate committee held a hearing on SB 2506, which also proposed to raise the HARPTA withholding rate from 5% to 9%. At the conclusion of that day’s hearing, the Committee passed the bill out with some amendments; the bill is now in the House.
“At that time, Senators,” I continued, “I said that the withholding rate in the bill was excessive because the capital gains tax rate for individuals is 7.25%, and for corporations it’s 4%. Withholding isn’t a tax, it’s just a way of making sure that the tax gets paid. So it’s valid only if the withholding amount is a reasonable estimate of the tax. At that time the Committee agreed with me and passed the bill out with a withholding rate of 7.25%.”
“But that was before we got the Governor’s Message telling us we have a $50 million hole we have to fill,” the Chair said. (We discussed the Governor’s Message last week.) “The Department of Taxation is saying this bill will generate $15.6 million for fiscal year 2019 and $4.6 million for each fiscal year thereafter.” (Indeed, these revenue projections are memorialized in the committee report.)
But wait a minute. Withholding isn’t tax. A huge revenue gain like that means either that (1) the withheld amount is being used to pay income tax that otherwise wouldn’t be paid, or (2) it’s being intercepted to pay other kinds of taxes, such as general excise and transient accommodations taxes on rental income that is coming from the property, that weren’t getting paid and were brought to light when the property got sold. If the revenue gain goes up even when the withholding rate is higher than the income tax rate, it means the problem isn’t income tax; it’s the GET and TAT that aren’t being paid.
If that’s the real problem, this bill isn’t the right solution. The solution needs to focus on the GET and TAT, which need to be paid on an ongoing basis rather than caught by chance in the end when the property is sold. So, how about imposing a withholding requirement on property managers or rental pool operators? It may be a bit of extra paperwork, but it may be better than requiring the rest of us to pay higher and more burdensome taxes to make up for the scofflaws, the blissfully ignorant, and others who owe the GET and TAT but aren’t paying it.