SB 494

SUBJECT:  INCOME, Tax Credit, Disposition of Excess Revenues

BILL NUMBER:  SB 494

INTRODUCED BY:  DELA CRUZ

EXECUTIVE SUMMARY:  Provides for a tax credit and appropriations to the rainy day fund and the trust fund for “other post-employment benefits’ (OPEB) for state workers.  This bill implements Article VII, section 6, of the Hawaii Constitution.

SYNOPSIS:  Adds an uncodified section providing for a general income tax credit in an unspecified amount for each taxpayer filing an individual return in 2019.

Makes appropriations of unspecified amounts to the emergency and budget reserve fund, the other post-employment benefits trust fund,

EFFECTIVE DATE:  July 1, 2019.

STAFF COMMENTS:  Article VII, section 6 of the Hawaii Constitution requires that whenever the state general fund balance at the close of each of two successive fiscal years exceeds five percent of general fund revenues for each of the two fiscal years, the legislature shall either:  (1) provide a tax credit or refund to the taxpayers of the State; (2) deposit the money into a rainy day fund ; or (3) appropriate general funds for either (A) debt service or (B) OPEB.

It’s hard to get excited about this provision, however, because the Constitution does not say anything about how much of the excess revenues are to be disposed of in these ways.

The last time we had a constitutional convention, in 1978, delegates thought that government shouldn’t be keeping the people’s money if it didn’t have to.  “Your Committee believes that it is proper for the State’s taxpayers to benefit from any surplus in the State’s general fund balance,” they said in Committee of the Whole Report No. 14.

So, they put before the voters, and the voters approved, what became Article VII, section 6 of our Constitution.  It says that if our general fund balance is more than 5% of general fund revenues for two fiscal years in a row, then the legislature is supposed to enact a tax credit or refund to give some of that money back to us taxpayers.

This credit came to be called the general income tax credit.

In the first year the provision was effective, 1981, the surplus requirements were met, and lawmakers gave the taxpayers a credit of $100 per head.

In 1982, the surplus requirement was met again, but lawmakers thought that $100 was a little much. So, they knocked it down to $25.

In 1983, the surplus requirement was met again, and lawmakers apparently decided that this dumb credit was getting in the way of good budgeting.  They slashed it to $1.

For the next five years in a row, the surplus requirement was met again, and lawmakers gave the taxpayers a credit of $1 in each of those years.

In 1989, with Hawaii’s economy apparently on a roll, lawmakers generously approved a $125 general income tax credit!  It didn’t take long for cooler heads to prevail, however.  The credit was cut to $60 the following year, and in 1991—yes, you guessed it—we were back to $1, where we stayed through 1995.

In 1996, the surplus requirement was not met.  No credit was required, and none was given.  This continued through 2000.

In 2001, we once again met the surplus requirement.  Once again lawmakers gave us a $1 credit.  The same happened in 2002.

For the years 2003-2006, the surplus requirement wasn’t met.

In 2007, state coffers were in great shape and the general income tax credit again sprung to life.  This time lawmakers tiered it so more would be given to poorer people.  It ranged from zero to $160.

In 2008 and 2009, the economy sunk but the surplus requirement was met.  Two more years of a $1 credit resulted.

In 2010, the legislature proposed, and voters approved, a constitutional amendment that allowed lawmakers to forgo providing a tax credit if they instead shoved some money into our rainy-day fund.  Thus 2009 was the last year of the general income tax credit.

Source:  Hawaii Department of Taxation reports

Here is the raw data:

Hawaii General Income Tax Credit

Year Cr Reqd? $ Amount Implementing Law
1981 Yes 100 Act 231 SLH 1981
1982 Yes 25 Act 132 SLH 1982
1983 Yes 1 Act 97 SLH 1983
1984 Yes 1 Act 55 SLH 1984
1985 Yes 1 Act 81 SLH 1985
1986 Yes 1 Act 49 SLH 1986
1987 Yes 1 Act 41 SLH 1987
1988 Yes 1 Act 185 SLH 1988
1989 Yes 125 Act 323 SLH 1989
1990 Yes 60 Act 186 SLH 1990
1991 Yes 1 Act 179 SLH 1991
1992 Yes 1 Act 128 SLH 1992
1993 Yes 1 Act 184 SLH 1993
1994 Yes 1 Act 85 SLH 1994
1995 Yes 1 Act 93 SLH 1995
1996 No 0
1997 No 0
1998 No 0
1999 No 0
2000 No 0
2001 Yes 1 Act 36 SLH 2001
2002 Yes 1 Act 63 SLH 2002
2003 No 0
2004 No 0
2005 No 0
2006 No 0
2007 Yes 0-160 Act 210, SLH 2007
2008 Yes 1 Act 58, SLH 2008
2009 Yes 1 Act 84, SLH 2009

In 2016, voters approved a further constitutional amendment that would allow the money to go to debt service or OPEB.

But still there is nothing mandating any particular amount.

So where is our $1 going to go this year?

Digested 2/1/2019

HB 523

SUBJECT:  GENERAL EXCISE, Exempt Mobility Enhancing and Durable Medical Equipment

BILL NUMBER:  HB 523

INTRODUCED BY:  TOKIOKA, CREAGAN, DECOITE, HAR, KONG, NISHIMOTO, OKIMOTO, SAY, TAKAYAMA, YAMANE

EXECUTIVE SUMMARY:  Expands the current exemption for prescription drugs and prosthetic devices to include more items specific to health care.  The expanded list of items appears to be consistent with the policy justification for the original exemption.  In addition, some of the changes in this bill would rectify an anomaly that exists under current law.

SYNOPSIS:  Modifies the current exemption for prescription drugs and prosthetic devices in HRS §237-24.3(6), so as to exempt gross proceeds from the sales of the following for human use:  (A)  Prescription drugs sold pursuant to a doctor’s prescription; (B)  Diabetic supplies; (C)  Prosthetic devices; (D)  Medical oxygen; (E)  Human blood and its derivatives; (F)  Durable medical equipment for home use; (G)  Mobility enhancing equipment sold by prescription; and (H)  Repair and replacement parts for any of the foregoing exempt devices and equipment;

Defines “prescription” as an order, formula, or recipe issued in any form of oral, written, electronic, or other means of transmission by a duly licensed practitioner authorized by the laws of this State.

Defines “mobility enhancing equipment” as equipment, including repair and replacement parts, other than durable medical equipment, that:  (A)  Is primarily and customarily used to provide or increase the ability to move from one place to another and which is appropriate for use either at home or in a motor vehicle; (B)  Is not generally used by persons with normal mobility; and (C)  Does not include any motor vehicle or equipment on a motor vehicle normally provided by a motor vehicle manufacturer.

Redefines “prosthetic device” as a replacement, corrective, or supportive device including repair and replacement parts for same worn on or in the body in order to:  (A)  Artificially replace a missing portion of the body; (B)  Prevent or correct a physical deformity or malfunction; or (C)  Support a weak or deformed portion of the body; provided that “prosthetic device” shall not mean any ophthalmic, dental, or ocular device or appliance, instrument, apparatus, or contrivance.  Examples of prosthetic devices are hearing aids and artificial limbs.

EFFECTIVE DATE:  Taxable years beginning after December 31, 2019.

STAFF COMMENTS:  Under the Hawaii GET law as it now exists, prescription drugs and prosthetic devices (including replacement parts) are exempt when received by a hospital, medical clinic, health care facility, pharmacy, or licensed health care practitioner for selling the drugs or devices to an individual.  The Department of Taxation has carefully interpreted this exemption in Tax Information Release 86-4.

Under TIR 86-4, the following medical devices do not qualify for exemption:  bandages, thermometers, hypodermic needles, diaphragm syringes, gauze, orthopedic support, inhalation extender devices, food products/supplements, dietary supplements, prophylactics, contact lens preparations, wheelchairs, crutches, canes, quad canes, and walkers.  The expanded definitions in the bill would make a good portion of the above exempt, and appear to be consistent with the policy justification for the original exemption.

The bill proposes to expand the exemption without regard to who is selling the articles.  This may help to correct an anomaly that now exists in the law.  Compare the following situations:

Drug manufacturer M sells a drug to retail pharmacy R who sells it to patient P. The sale from R to P is exempt and the sale from M to R is a wholesale sale taxed at 0.5%.  Total tax:  5%.

Drug manufacturer M sells a drug to GET-exempt hospital H who sells it to patient P. The sale from H to P is exempt because H is a tax-exempt organization.  The sale from M to H does not qualify as a wholesale sale because an exempt organization is not a “licensed seller” and the exemption doesn’t apply because the sale is not to a patient.  The sale is a retail sale taxed at 4%.  Total tax:  4%.

Businesses providing similar, if not identical, goods or services should be treated equally as the tax is on the business and not on the customer.  The law now discriminates against tax-exempt hospitals, infirmaries, and sanitaria (HRS §237-23(a)(6)).

Digested 2/12/2019

HB 632; SB 332 (Identical)

SUBJECT:  GENERAL EXCISE, Exempt Mobility Enhancing and Durable Medical Equipment

BILL NUMBER:  HB 632; SB 332 (Identical)

INTRODUCED BY:  HB by LUKE; SB by K. RHOADS, HARIMOTO, Ruderman

EXECUTIVE SUMMARY:  Expands the current exemption for prescription drugs and prosthetic devices to include more items specific to health care.  The expanded list of items appears to be consistent with the policy justification for the original exemption.  In addition, some of the changes in this bill would rectify an anomaly that exists under current law.  Note that this draft of the bill could result in medical marijuana being exempt.

SYNOPSIS:  Modifies the current exemption for prescription drugs and prosthetic devices in HRS §237-24.3(6), so as to exempt gross proceeds from the sales of the following for human use:  (A)  Prescription drugs sold pursuant to a prescription; (B)  Diabetic supplies; (C)  Prosthetic devices; (D)  Medical oxygen; (E)  Human blood and its derivatives; (F)  Mobility enhancing equipment sold by prescription; and (G)  Repair and replacement parts for any of the foregoing exempt devices and equipment;

Deletes the existing definitions for “prescription drugs” and “prosthetic device.”

EFFECTIVE DATE:  Taxable years beginning after December 31, 2018.

STAFF COMMENTS:  Under the Hawaii GET law as it now exists, prescription drugs and prosthetic devices (including replacement parts) are exempt when received by a hospital, medical clinic, health care facility, pharmacy, or licensed health care practitioner for selling the drugs or devices to an individual.  The Department of Taxation has carefully interpreted this exemption in Tax Information Release 86-4.

Under TIR 86-4, the following medical devices do not qualify for exemption:  bandages, thermometers, hypodermic needles, diaphragm syringes, gauze, orthopedic support, inhalation extender devices, food products/supplements, dietary supplements, prophylactics, contact lens preparations, wheelchairs, crutches, canes, quad canes, and walkers.  The expanded definitions in the bill would make a good portion of the above exempt, and appear to be consistent with the policy justification for the original exemption.

The bill proposes to expand the exemption without regard to who is selling the articles.  This may help to correct an anomaly that now exists in the law.  Compare the following situations:

Drug manufacturer M sells a drug to retail pharmacy R who sells it to patient P. The sale from R to P is exempt and the sale from M to R is a wholesale sale taxed at 0.5%.  Total tax:  5%.

Drug manufacturer M sells a drug to GET-exempt hospital H who sells it to patient P. The sale from H to P is exempt because H is a tax-exempt organization.  The sale from M to H does not qualify as a wholesale sale because an exempt organization is not a “licensed seller” and the exemption doesn’t apply because the sale is not to a patient.  The sale is a retail sale taxed at 4%.  Total tax:  4%.

Businesses providing similar, if not identical, goods or services should be treated equally as the tax is on the business and not on the customer.  The law now discriminates against tax-exempt hospitals, infirmaries, and sanitaria (HRS §237-23(a)(6)).

Note that this bill deletes the existing definition for prescription drugs.  That definition contains an exclusion for cannabis products.  Without the exclusion, there is a good argument that medical cannabis qualifies for the exemption.

Digested 2/12/2019

SB 76, SD-1

SUBJECT:  INCOME TAX

BILL NUMBER:  SB 76, SD-1

INTRODUCED BY:  Senate Committee on Ways and Means

EXECUTIVE SUMMARY:  Establishes a non-refundable tax credit for the purchase of a personal emergency response system, under certain conditions.

SYNOPSIS:  Adds a new section to chapter 235, HRS, to establish a tax credit for purchase of a personal emergency response system for a taxpayer who has an adjusted gross income of less than $45,000.

Defines “personal emergency response system” as an alarm system designed to permit the user to signal the occurrence of a medical or personal emergency to alert a provider.

The amount of the credit is $____.  The credit is nonrefundable but may be carried forward until exhausted.

Requires the director of taxation to prepare any forms necessary to claim a credit, may require a taxpayer to furnish reasonable information to validate a claim for the credit, and adopt rules pursuant to HRS chapter 91. Requires claims for the credit, including any amended claims, to be filed on or before the end of the twelfth month following the taxable year for which the credit is claimed. Failure to comply with the foregoing provision shall constitute a waiver of the right to claim the tax credit.

EFFECTIVE DATE:  This Act, upon its approval, shall apply to taxable years beginning after December 31, 2018.

STAFF COMMENTS:  Lawmakers need to keep in mind two things. First, the tax system is the device that raises the money that they, lawmakers, like to spend. Using the tax system to shape social policy merely throws the revenue raising system out of whack, making the system less than reliable as there is no way to determine how many taxpayers will avail themselves of the credit and in what amount. The second point to remember about tax credits is that they are nothing more than the expenditure of public dollars, but out the back door. If, in fact, these dollars were subject to the appropriation process, would taxpayers be as generous about the expenditure of these funds when our kids are roasting in the public school classrooms, there isn’t enough money for social service programs, or our state hospitals are on the verge of collapse?

If lawmakers want to subsidize the purchase of personal emergency response systems, then a direct appropriation would be more accountable and transparent.

Furthermore, the additional credit would require changes to tax forms and instructions, reprogramming, staff training, and other costs that could be massive in amount.  A direct appropriation, or adding on to an existing rebate program, may be a far less costly method to accomplish the same thing.

Digested 2/12/2019

HB 287

SUBJECT:  ADMINISTRATION, Restrict DOTAX Ability to Foreclose Tax Lien Property

BILL NUMBER:  HB 287

INTRODUCED BY:  SAN BUENAVENTURA

EXECUTIVE SUMMARY:  Allows the Department of Taxation to utilize nonjudicial foreclosures on abandoned property on which there is a recorded tax lien.  Such property already may be foreclosed under existing law.  This measure may well constrain the Department’s ability to use nonjudicial foreclosure on other properties.

SYNOPSIS:  Adds a new section to chapter 46, HRS, directing the counties to establish an expedited procedure to approve permits for the demolition of vacant residential structures.

Adds a new section to chapter 667, HRS, providing that a state tax lien may be foreclosed by nonjudicial or power of sale foreclosure if the structure on the property is vacant and abandoned.

Amends section 231-62, HRS, which normally deals with judicial foreclosure, by providing that liens that have existed for three or more years on vacant and abandoned residential realty may be enforced without suit.

Amends section 231-63, HRS, which normally deals with nonjudicial foreclosure, to allow such foreclosure against residential realty provided that a number of conditions are met:

(1)  The department of taxation shall establish that a residential structure is vacant and abandoned by mailing to the residential structure’s owner by certified mail with return receipt a sworn statement establishing that the department of taxation has conducted at least  _____ separate inspections, each at least _____ days apart and at different times of day, and at each inspection, no occupant was present and there was no evidence of occupancy.  The department of taxation shall maintain a copy of the statement and return receipt on file for the owner’s inspection and review.

(2)  Prima facie evidence that a residential structure is not vacant and abandoned shall include but is not limited to delivery of certified U.S. mail and ongoing and current utility usage.

(3)  A residential structure shall not be deemed vacant and abandoned where the structure is:

(A)  Undergoing construction, renovation, or rehabilitation that is proceeding diligently;

(B)  Used on a seasonable basis but is otherwise secure;

(C)  The subject of any ongoing probate action, action to quiet title, or other ownership dispute;

(D)  Damaged by natural disaster but the owner intends to repair and reoccupy; or

(E)  Occupied by a mortgagor, relative, or lawful tenant.

EFFECTIVE DATE:  July 1, 2019.

STAFF COMMENTS:  The bill recites that its purpose is to allow DOTAX to seek nonjudicial foreclosure sale of vacant and abandoned property with an outstanding recorded state tax lien.  That cannot be true because DOTAX already has this power in section 231-63, HRS.  Rather, this bill imposes significant and burdensome conditions upon foreclosures of any kind.

To preserve the rights of our State to collect taxes due but unpaid, DOTAX has the right and duty to collect against all property and rights to property owned by the debtor.  That includes the right, now in HRS sections 231-62 and 231-63, to foreclose against liened property using any procedure now allowed in law.  The Department is allowed to foreclose against real property if it is occupied or not, if court action actuated by other owners or beneficiaries is ongoing or not, and whether or not relatives or tenants are living on it.

If those rights are significantly abridged as this bill contemplates, a significantly larger portion of the cost of government necessarily will need to be borne by law-abiding citizens to make up for the scofflaws, deadbeats, and tax dodgers that this bill coddles and protects.

Digested 2/11/2019

HB 327

SUBJECT:  MISCELLANEOUS, Single Occupant Vehicle Access Fee to Use Zipper Lane

BILL NUMBER:  HB 327

INTRODUCED BY:  AQUINO, CABANILLA ARAKAWA, ELI, GATES, MCDERMOTT, YAMANE

EXECUTIVE SUMMARY:  Directs the Department of Transportation to develop and implement a single occupant vehicle access fee to use a zipper lane on Oahu. Requires that revenues generated from the single occupant vehicle access fee be deposited in the state highway fund.  We have concerns that the fee may be preempted by federal statutes governing the interstate highway system, of which the H-1 Freeway is a part.

SYNOPSIS:  Adds a new section to section 291C, HRS, directing DOT to develop and implement a system in which drivers may pay a single occupant vehicle access fee of $_____to  the department in exchange for use of a high occupancy vehicle lane that has been designated as a zipper lane on the island of Oahu regardless of the number of occupants in the motor vehicle.

States that the revenues are to be deposited in the state highway fund.

EFFECTIVE DATE:  Upon approval.

STAFF COMMENTS:  Recently, we have heard the term “congestion pricing” bandied about as a way of improving traffic congestion here, and of raising more money.

What is it?  Congestion pricing is a way of charging motorists for driving in designated areas during designated times.  For example, in London, drivers pay a daily fee of about $16 to drive to the heart of the city on weekdays between 7 a.m. and 6 p.m.  According to the British online magazine CityMetric, the number of private cars entering the protected zone dropped by 39%.

“It absolutely works,” Mayor Caldwell is quoted as saying.  But: “It’s fraught with political problems.”

Even if the political problems could be overcome, how would it work?

This bill contemplates the State charging to use the zipper lane on the H-1.  It’s possible, with current technology, to set up devices at onramps to check in cars, either through license plate number recognition software or through transponders.  The owners of those cars then receive a bill every so often.

There are some wrinkles, however.  One is that the H-1 is part of the federal Interstate Highway System (although the word “Interstate” means “between states” and our freeways obviously aren’t).  Which means federal law dictates whether states or cities can charge a toll for accessing the freeway.  The 1956 National Interstate and Defense Highways Act generally prohibits state and local governments from charging tolls on interstate highways.  There have been some exceptions to this rule, and President Trump has proposed scrapping the restriction altogether, but the law still exists so it may not be possible for the proposed toll charge to take effect.

Digested 2/11/2019

HB 1215

SUBJECT:  INCOME, Credit for Taxpayers Living Within 10 Miles of Work

BILL NUMBER:  HB 1215

INTRODUCED BY:  ELI, GATES, JOHANSON, LUKE, MORIKAWA, NISHIMOTO, TODD, WILDBERGER, Aquino, Ichiyama, Kitagawa, McKelvey

EXECUTIVE SUMMARY:  Establishes an income tax credit for taxpayers who live within 10 miles of their place of employment to offset expenses incurred for motor vehicle registration and inspection.

SYNOPSIS:  Adds a new section to chapter 235 to establish the motor vehicle registration and inspection tax credit.

EFFECTIVE DATE:  This Act, upon its approval, shall apply to taxable years beginning after December 31, 2018.  The credit is equal to 100% of the qualified expenses of the qualified taxpayer, up to $_____.

Defines “qualified taxpayer” as a resident of the State who resides within ten miles of the taxpayer’s place of employment.

Defines “qualified expenses” as expenses incurred by a qualified taxpayer for motor vehicle registrations and motor vehicle inspections.

The tax credit is not refundable, but unused credits may be carried forward until exhausted.

Requires the director of taxation to prepare any forms necessary to claim a credit, may require a taxpayer to furnish reasonable information to validate a claim for the credit, and adopt rules pursuant to HRS chapter 91. Requires claims for the credit, including any amended claims, to be filed on or before the end of the twelfth month following the taxable year for which the credit is claimed. Failure to comply with the foregoing provision shall constitute a waiver of the right to claim the tax credit.

STAFF COMMENTS:  This bill awards a tax credit for people who live within 10 miles of their working place.  People already have lots of motivation to live close to work.  (It’s called “traffic.”)  If anything, those of us who are forced by land prices to live out in the ‘burbs need relief from the punishing fuel taxes that need to be paid to keep the ol’ jalopy chugging along.

Digested 2/11/2019

HB 1574, HD-1

SUBJECT:  TOBACCO, Prohibits Shipment of Tobacco Products, Adds Electronic Smoking Devices, Hikes Rates and Fees

BILL NUMBER:  HB 1574, HD-1

INTRODUCED BY:  House Committee on Health

EXECUTIVE SUMMARY:  Prohibits the shipment of tobacco products, and the transport of tobacco products ordered or purchased through a remote sale, to anyone other than a licensee. Makes all provisions of the cigarette tax and tobacco tax law that relate to tobacco products applicable to e-liquid. Increases the license fee for wholesalers or dealers and the retail tobacco permit fee. Amends the taxes on cigarettes and tobacco products. Increases the excise tax for each cigarette or little cigar sold, used, or possessed by a wholesaler or dealer. Increases the excise tax on the wholesale price of each article or item of tobacco products, other than large cigars, sold by the wholesaler or dealer.  Our question is whether tax increases are an effective way to advance the social policy goals contained in this measure.

SYNOPSIS:  Adds a new section to chapter 245, HRS, to establish the offense of unlawful shipment of tobacco products.  If a person is in the business of selling tobacco products and ships to a person in Hawaii that is not a tobacco tax licensee, the person commits the offense.  Exceptions are provided if the tobacco products are exempt from Hawaii tobacco tax, or Hawaii tobacco tax on the products is already fully paid.  The offense may be a class C felony if the products being shipped have a value of $10,000 or more, otherwise it is a misdemeanor.

Amends section 245-1, HRS, to include “e-liquid” within the definition of tobacco products taxable under the Tobacco Tax Law, and to define “e-liquid” as any liquid or like substance that may or may not contain nicotine and that is designed or intended to be used in an electronic smoking device, whether or not packaged in a cartridge or other container; except that E-liquid shall not include prescription drugs; medical cannabis or manufactured cannabis products; or medical devices used to inhale or ingest prescription drugs, including manufactured cannabis products sold or distributed in accordance with section 329D-10(a).

Defines “electronic smoking device” as any electronic product, or part thereof, that can be used by a person to simulate smoking in the delivery of nicotine or any other substance, intended for human consumption, through inhalation of vapor or aerosol from the product.  Electronic smoking device includes but is not limited to an electronic cigarette, electronic cigar, electronic cigarillo, electronic pipe, electronic hookah, vape pen or related product, and any cartridge or other component part of the device or product.

Amends section 245-2, HRS, to raise the annual fee for a tobacco license from $2.50 to $250.00.

Amends section 245-2.5, HRS, to raise the annual fee for a retail tobacco permit from $20 to $50.

Amends section 245-15, HRS, to add an earmark of $200,000 to go to the Hawaii tobacco prevention and control trust fund.

Repeals chapter 28, part XII, HRS, relating to the electronic smoking device retailer registration unit within the Department of the Attorney General.

Repeals section 245-17, HRS, relating to delivery sales.

EFFECTIVE DATE:  July 1, 2050.

STAFF COMMENTS:  The question that should be asked is the purpose of the tobacco tax. If the goal is to make people stop smoking by making it cost-prohibitive to smoke, then (a) it’s working, as hikes in the cigarette tax have begun to exert downward pressure on collections not only locally but also nationally, but (b) it shouldn’t be expected to raise revenue, because of (a). If the goal is really to stop the behavior, why are we not banning it?

As the Foundation’s previous President, Lowell Kalapa, wrote in the Tax Foundation of Hawaii’s weekly commentary on October 28, 2012:

Lawmakers seem to have a simplistic reaction to solving problems the solution to which plagues their constituents – tax it.

Probably the best example is what people like to call sin taxes, those excise taxes that are levied on tobacco and alcohol products.  After all, smoking causes cancer and alcohol causes all sorts of problems including driving under the influence.  Lawmakers and community advocates shake their heads and push for higher tax rates, arguing that making these products more expensive will deter folks from using these products.

The problem is that lawmakers also like the revenues that are generated from the sales of these products and, in some cases, they have tried to link the use and sale of these products with noble causes such as the funding of the Cancer Research Center that is currently being built.  Again, the argument is that smokers should pay for programs and projects which seek to cure the related ill which in this case is cancer caused by smoking.

The irony is that arguments to increase the tax on tobacco and, more specifically, cigarettes, is a goal of getting smokers to quit while depending on the revenues from tobacco and cigarette taxes to fund an ongoing program, in this case the Cancer Research Center.  So, which is it folks, stop smokers from smoking and if successful, there won’t be any revenues to fund the Cancer Research Center?

The fact of the matter is that it appears that both locally and nationally, higher taxes on cigarettes is having an effect on smokers as, for the first time, tax collections on the sale of cigarettes have fallen below the previous year’s tax collections.  Certainly some of the decline is due to smokers actually quitting, but to some degree one has to suspect that some purchases were made via mail order from exempt Indian reservation outlets while others may be what is called gray market purchases, that is from sources outside the country.

What should come as a surprise is that most of the folks who have quit are of some means as they are more likely to recognize the health hazard caused by use of this product. That means most of those who are still smoking are among the lower-income members of our community.  Thus, the tax is regressive, generating less and less collections from middle and higher-income individuals.

As predicted, programs that have been fed by earmarks from the tobacco tax, like the Cancer Research Center, have become a victim of the success of tobacco cessation programs and publicity.  Revenues produced by the tobacco tax have been in steady decline over the past few years despite tax rate increases, and hoisting the smoking age to 21 in the 2015 session certainly didn’t reverse the trend.

Source:  Department of Taxation Annual Report (2017-2018), page 22.

Do we really need an elaborate study to tell ourselves that fiscal reliance on funds from a sin tax is inadvisable or outright dangerous?  If the goal is to affect social behavior, use of the tax law is not the most effective way to do so.

Digested 2/11/2019

SB 1394

SUBJECT:  INCOME, Historic Preservation Tax Credit

BILL NUMBER:  SB 1394

INTRODUCED BY:  MORIWAKI, S. CHANG, Nishihara, Shimabukuro, Taniguchi

EXECUTIVE SUMMARY:  Establishes a refundable tax credit based on the qualified rehabilitation expenses of a historic structure.  The adoption of this credit would provide tax relief to taxpayers regardless of their need for tax relief. It also would shift the burden of paying for government to the rest of us.

SYNOPSIS:  Adds a new section to HRS chapter 235 to allow a credit for a rehabilitation plan or a certified historic property that is certified by the historic preservation division of DLNR.

The credit is to be 25% of the qualified rehabilitation expenditures, or 30% if (A) at least 20% of the units are rental units and qualify as affordable housing, or (B) at least 10% of the units are individual homeownership units and qualify as affordable housing.

The credit is available in the taxable year in which the substantially rehabilitated structure is placed into service.  If completed in phases, the tax credit shall be prorated to the identifiable portion of the building placed into service during that taxable year.

Tax credits that exceed the taxpayer’s income tax liability may be refunded.

For a partnership, S corporation, estate, or trust, the cost upon which the credit is computed shall be determined at the entity level and the distribution and share of the tax credit shall be determined pursuant to section 704(b) of the Internal Revenue Code.

Requires the director of taxation to prepare any forms necessary to claim a credit, may require a taxpayer to furnish reasonable information to validate a claim for the credit, and adopt rules pursuant to HRS chapter 91. Requires claims for the credit, including any amended claims, to be filed on or before the end of the twelfth month following the taxable year for which the credit is claimed. Failure to comply with the foregoing provision shall constitute a waiver of the right to claim the tax credit.

The aggregate amount of tax credits claimed shall not exceed $_____ for the 2020 tax year, $_____ for the 2021 tax year, $_____ for the 2022 tax year, $_____ for the 2023 tax year, and $_____ for the 2024 tax year and every year thereafter.

Provides that following the completion of rehabilitation of a certified historic structure, the owner shall notify the state historic preservation division that the rehabilitation has been completed.  The owner shall provide the state historic preservation division with documentation of the costs incurred in rehabilitating the historic structure and shall submit certification of the costs incurred in rehabilitating the historic structure.  The state historic preservation division shall review the rehabilitation and verify that the rehabilitation project complied with the rehabilitation plan.  The administrator of the state historic preservation division shall certify in writing that the rehabilitation has been completed in accordance with the approved rehabilitation plan, and provide that certification to both the project proponent and the director of taxation.

Provides that each taxpayer claiming this credit shall, no later than the last day of the taxable year following the close of the tax year in which qualified costs were expended, submit a written, certified statement to the state historic preservation division containing the qualified rehabilitation expenditures incurred by the taxpayer and any other information the state historic preservation division or department of taxation may require.  If this information is not submitted, the taxpayer shall not be eligible to receive the tax credit for those expenses, and any credit already claimed for that taxable year shall be recaptured in total.  A recaptured tax credit shall be added to the taxpayer’s tax liability for the taxable year in which the recapture occurs.

Provides for recapture of a previously claimed tax credit if any of the following occur:  (1) the projected qualified expenditures do not materialize; (2) the qualified rehabilitation plans do not proceed in a timely manner and in accordance with the approved plans; (3) in the case of the thirty per cent tax credit, less than twenty per cent of the units qualify as affordable rental housing; or (4) in the case of the twenty per cent tax credit, less than ten per cent of the units qualify as affordable homeownership units.

Defines “qualified rehabilitation expenditures” as any costs incurred for the physical construction involved in the certified rehabilitation of a certified historic structure; provided that for projects involving mixed residential and non-residential uses, at least thirty per cent of the total square footage of the rehabilitation is placed into service for residential use.  “Qualified rehabilitation expenditures” shall not include the owner’s personal labor.

Defines “rehabilitation plan” as any construction plans and specification for the proposed rehabilitation of a historic structure in sufficient detail for evaluation of compliance with the rules adopted by the state historic preservation division.

Defines “substantial rehabilitation” as the qualified rehabilitation expenditures of a historic structure that exceed twenty-five per cent of the assessed value of the structure.

EFFECTIVE DATE:  Credit affects taxable years beginning after December 31, 2019.

STAFF COMMENTS:  Lawmakers need to keep in mind two things. First, the tax system is the device that raises the money that they, lawmakers, like to spend. Using the tax system to shape social policy merely throws the revenue raising system out of whack, making the system less than reliable as there is no way to determine how many taxpayers will avail themselves of the credit and in what amount. The second point to remember about tax credits is that they are nothing more than the expenditure of public dollars, but out the back door. If, in fact, these dollars were subject to the appropriation process, would taxpayers be as generous about the expenditure of these funds when our kids are roasting in the public school classrooms, there isn’t enough money for social service programs, or our state hospitals are on the verge of collapse?

If lawmakers want to subsidize the rehabilitation of certified historic buildings, then a direct appropriation would be more accountable and transparent.

Furthermore, the additional credit would require changes to tax forms and instructions, reprogramming, staff training, and other costs that could be massive in amount.  A direct appropriation may be a far less costly method to accomplish the same thing.

Finally, the credit is directed to persons who might have no need for financial assistance.

Technical changes that are needed in the bill as it is now drafted include the following:

  • As drafted, the bill appears to allow for credit to be claimed for estimated rehabilitation costs, with recapture to occur later if the costs were not actually expended or the documentation is insufficient. Once money goes out the door, however, it may be difficult to recover.
  • As drafted, the bill appears to contemplate certification of the costs by the historic preservation division before the credit can be claimed. This does not seem to be consistent with the parts of the bill contemplating allowing a credit claim based on estimated costs.  We suggest that the credit claim be allowed only for actual costs that are certified by the historic preservation division.
  • The bill does not clearly task either the historic preservation division or the department of taxation with keeping track of the aggregate cap on the credit, and does not provide direction as to what to do if the claims exceed the cap.
  • The recapture condition in (j)(4) is not consistent with (a)(2)(B) because if 10% are individual homeownership units that qualify as affordable housing, a 30% credit is awarded. There is no 20% credit in the bill as now drafted.
  • The definition of “substantial rehabilitation” as now drafted does not make sense. The following may have been intended:  “Substantial rehabilitation” means that qualified rehabilitation expenditures of a historic structure exceed twenty-five per cent of the assessed value of the structure.

Digested 2/8/2019

SB 1463; HB 1459 (Identical)

SUBJECT:  FUEL, Carbon Emissions Tax; License Tax

BILL NUMBER:  SB 1463; HB 1459 (Identical)

INTRODUCED BY:  SB by K. RHOADS, RUDERMAN, Baker, S. Chang, Harimoto, Keith-Agaran, Shimabukuro; HB by TARNAS, BROWER, ELI, ICHIYAMA, D. KOBAYASHI, C. LEE, LOWEN, MIZUNO, NAKASHIMA, SAY, TODD, Creagan, Morikawa

EXECUTIVE SUMMARY:  The bill intends to replace the current barrel tax and fuel tax with a revenue neutral carbon emission tax on the sale of all fuels with carbon content.  This bill forces us to rethink how we now tax fossil fuel.  The current patchwork of different state and local taxes all applying at once leads to unclear and inconsistent messages sent to the taxpaying public, which is not good for implementing social policy regardless of what the policy is.

SYNOPSIS:  Renames chapter 243, HRS, as the Carbon Emissions and Fuel Tax Law.

Amends section 243-3.5, HRS, which now imposes the barrel tax, to a carbon emissions tax calibrated to $6.25 per ton of CO2.  The tax is imposed on a distributor of the fuel.

Provides that the tax is distributed as follows:

  • $1,290,000 to the environmental response revolving fund (HRS section 128D-2);
  • $3,872,000 to the energy security special fund (HRS section 201-12.8);
  • $2,582,000 to the energy systems development special fund (HRS section 304A-2169.1);
  • $3,872,000 to the agricultural development and food security special fund (HRS section 141-10).

Provides grandfather protection to coal used to fulfill a signed power purchase agreement between an independent power producer and an electric utility that is in effect between June 30, 2015, and September 1, 2022.

Exempts fuel sold for use in and actually delivered to, or sold in, the county of Kalawao.

Amends HRS section 243-4 to delete the state fuel tax and to exempt from county fuel tax gasoline or other aviation fuel sold for use in or used for airplanes, or naphtha sold for use in a power-generating facility.

Makes technical and conforming changes.

Repeals HRS section 235-110.6 (which now provides for a fuel tax credit for commercial fishers).

EFFECTIVE DATE:  Applies to taxable years beginning after December 31, 2018.

STAFF COMMENTS:  An economist from UHERO, the University of Hawaii Economic Research Organization, recently posted an analysis arguing that strong, decisive action such as a carbon tax is going to be needed if we are going to achieve the greenhouse gas goals.  “But without any specifics as to how we are to achieve [greenhouse gas] reductions – through a carbon tax or otherwise – it is largely symbolic,” she argues.

So what is a carbon tax?  It is a tax imposed on the carbon content of different fuels.  Typically, it is due and payable when the fuel is either extracted and placed into commerce, or when it is imported.  At present, neither the U.S. federal government nor any U.S. state has enacted a carbon tax.  The city of Boulder, Colorado, enacted one by referendum in 2006; it applies at the rate of $7 per metric ton of CO2 and is imposed on electricity generation only.  Several European Union countries, Japan, and South Africa have carbon taxes.

Presently, we have a liquid fuel tax (chapter 243, HRS).  Like a carbon tax, the fuel tax is imposed upon import and entry into commerce.  So, PFM Group, the consultant employed by the Hawaii Tax Review Commission, in its final report thought that the systems and processes we now have in place to collect fuel tax in Hawaii can be adapted to a carbon tax, and for that reason concluded that a carbon tax would entail “[l]ittle administrative burden.”  There are, however, several important differences between the two:

Both the county and state governments are given the power to impose fuel tax.  This bill repeals the state fuel tax but does not affect the counties’ power to impose fuel tax.

The fuel tax is now earmarked for Highway Fund use, and the money in that fund is spent by the Department of Transportation.  As a result, vehicles that don’t use the highways, such as tractors and other farm machinery, are exempt from fuel tax.  A carbon tax would need to apply to both on-road and off-road use, as long as the CO2 generated from burning it gets into the atmosphere.

The potential big losers will be the electric companies, because electric generation accounted for 6.8 million metric tons of CO2 in 2013 out of a total 18.3 million metric tons.  However, the electric companies won’t simply absorb the tax, but can be expected to pass on the enhanced costs to anyone who gets an electric bill.

Perhaps it’s good for lawmakers to worry about the end of the world as we know it, which perhaps will be staved off by the social change the tax encourages.  But their constituents are worried not about the end of the world, but the end of next week.  Will their paychecks be enough to pay the rent, keep the lights on, or feed the family?  If the cost of simply driving to work from the suburbs is horrible now, just wait until the tax kicks in.

And if you think the hammer of a carbon tax will fall most heavily on huge, faceless corporations like the electric company, the airlines, or the shippers, think again.  Businesses can and will pass on any enhanced costs to their consumers if they hope to continue providing their products or services.  That means our already astronomical cost of living could head further up into the stratosphere.  In theory, that would not happen under this bill, which is intended to be revenue neutral; but tax rates can be and are adjusted over time.

Digested 2/8/2019