Proposal to Raise Taxes on Investment Properties

Pros and cons of proposed constitutional amendment

UPDATE: The Hawai‘i Supreme Court on Friday, Oct. 19, 2018, ended the future of a proposed Hawai‘i constitutional amendment aimed at raising investment property taxes for education, making the question invalid and preventing it from being voted upon during next month’s general election. The Governor, Legislative and education group representatives expressed their disappointment and vowed to still pursue school funding. 

Hawaii residents will be asked to vote to make a change to Hawaii’s constitution this November, which would result in higher property taxes for some investment properties. However, four counties petitioned the Supreme Court this week to make the ballot question invalid.

The Legislature, at the urging of the teachers union, wants to raise more money for public schools. But instead of raising an existing state tax – such as the excise, income or hotel room taxes – state lawmakers want the authority to raise property taxes on “investment properties.” Normally the counties have property taxing authority. To allow the state to make such a ruling requires a constitutional amendment.

The City and County of Honolulu and Hawaii, Kauai and Maui counties had filed a lawsuit last month seeking to strike the question from the Nov. 6 ballot, but 1st Circuit Judge Jeff Crabtree earlier this month denied their motion to block the question.

The counties are now asking the Hawaii State Supreme Court to invalidate the ballot question, which has already been printed, “because it proposes giving the state Legislature a new taxing power without mentioning the word tax,” Honolulu Corporation Counsel Donna Leong said during a news conference that Mayor Kirk Caldwell’s office streamed on Facebook Live.

“No. 2, the additional tax is proposed to be on investment real property but there is no definition in the ballot as to what investment real property is,” she said. “No. 3, the ballot measure is unclear and misleading because the taxes are supposed to be used to support public education but there is nothing in the proposal that requires the taxes to be added to the funds that are presently appropriated for public education and this is a really important point.”

The bill for the ballot question was introduced in the Legislature at the request of the Hawaii State Teachers Association, which disputes the argument that allowing the state to levy a surcharge takes away from the counties’ constitutional right to tax real property.

“The constitutional amendment does not take away one dollar from the counties,” HSTA President Corey Rosenlee said in a statement. “Instead, the counties are trying to prevent our school system from being adequately funded.

Rosenlee has also said the surcharge is targeted toward investment properties valued at more than $1 million, but the ballot question — “Shall the legislature be authorized to establish, as provided by law, a surcharge on investment real property to be used to support public education?” — does not specify a value, or a surcharge rate.

Business leaders have joined the counties in opposing the proposed “surcharge” on investment property, which real estate experts say will have the effect of being passed through to tenants, not only of residential investment properties, but of commercial investment properties as well. The Tax Foundation of Hawaii plans to file an amicus brief in support of the counties’ position with the Supreme Court on Thursday.

“If passed, this tax could raise the cost of living, increase rent, impact affordable housing and, at the least, result in a double taxation,” Chamber of Commerce Hawaii President and CEO Sherry Menor-McNamara told members in an email Wednesday. “The proposed amendment will tax anyone who owns investment property of any value. So, local and out-of-state property owners will both be impacted no matter what type of property they own or how much it’s worth.”

Advocates of the bill say there is a significant and growing group of people who are not paying their fair share of taxes: Mainland and foreign residents who have their second, third or more home in Hawaii pay relatively low property taxes here compared to their homes elsewhere and pay no Hawaii income tax.

Although Hawaii residents pay significant taxes overall,  property tax rates are the lowest in the country, according to recent information from ATTOM Data Solutions, a company focused on national property data. The report says our average property tax rate is one-third of 1 percent: 0.32 percent. The second lowest is Alabama, with a property tax rate of 0.48 percent.

The counties are asking the high court to rule on the request before the Nov. 6 election.

Yesterday, the counties also filed an appeal of Crabtree’s decision with the Intermediate Court of Appeals.

2018-10-22T07:42:43+00:00