Yes, Toto, tourists also pay real property tax

On March 8, the Hawaii Department of Business, Economic Development, and Tourism released a study on Hawaii real property taxes.

On March 8, the Hawaii Department of Business, Economic Development, and Tourism released a study on Hawaii real property taxes.

It may be unusual for a state agency to do a study on a county tax. But this study appeared to be an outgrowth of a move by our teachers’ union during the 2016 legislative session, which we wrote about last year, to establish that our real property tax is too low. (Once that was established, the obvious strategy was to seek a surcharge on that tax to fund education, which we have written about in our last two weekly commentaries.) The bill that we talked about then didn’t pass, but its substance was incorporated into the state budget bill, obligating DBEDT to do the study.

One of the study’s key findings: “Nearly one third (32.3 percent) of the property taxes were contributed by property owners residing out-of-state.”

To us, the fact that some of our real property tax is being exported is not news. Honolulu’s “Residential A” property classification, for example, was designed to squeeze more dollars out of land owners who had residential properties they didn’t live in. The idea was that most of these absentee owners lived out of state, and maybe out of the country, so they could help foot the bill for those of us who actually live here. In addition, residential property is not the only property in town; all counties have different, and more expensive, property classifications for commercial, hotel/resort, and perhaps timesharing uses. A good amount of tax in those classifications is paid by nonresidents.

Rather, the news is the extent to which the tax is exported — nearly a third. This number blows a large hole in the City and County of Honolulu’s principal argument in the rail debate. The city administration had been arguing forcefully that the best solution to fund rail is the GET surcharge, and so that the surcharge should be extended forever. Why was it the best solution? About a third of the GET is exported, they said, and if the surcharge is not extended the fiscal shortfall would need to be made up by other county funding sources, the largest of which by far is the real property tax. But the real property tax falls almost exclusively on our residents, the argument goes, so it would be hurting all of us a lot more. Mayor Caldwell’s State of the City address in February 2015, for example, included: “Why would I as mayor want to give the visitors a break and make all of us pay everything? Let’s make the visitors pay one third.”

If a third of the GET is exported, as the city claims, and a third of the property tax is exported, as the DBEDT study indicates, then the argument doesn’t hold water.

Moreover, the extent to which the GET is exported is a matter of debate. The Hawaii Free Press, using a city auditor report, concluded that 14.1 percent of the GET is exported. The foundation came up with its own estimates using calculations from Hawaii Tourism Authority and Department of Taxation data for 2011-13, and found that the proportion of the surcharge attributable to visitor spending was 15-20 percent. If those numbers are closer to the truth, then the city administration has it backwards, and we might be able to export more tax using the real property tax than by using the GET.

But then again, if we rely more heavily on the real property tax to fund transportation, then what is going to happen to the real property tax surcharge to fund education? Clearly, this debate may lead to some cascading effects. We do hope that our policymakers will take the time to consider these matters fully before deciding to amplify the burdens on an already beleaguered populace.

Yamachika is president of the Tax Foundation of Hawaii.