Legislative Update: Highlights After Second Decking
In our legislative session, we have reached another milestone. The chamber other than the one originating the bill needs to come up with its final version of the bill. The originating chamber will in many cases disagree, leading to a conference committee from both sides to hammer out differences. Lots of bills have fallen by the wayside, including threatened increases in the tobacco tax and fuel tax, as well as proposed new taxes on medi-pot and REITs. What follows is a selection of bills that are still alive as of April 10, 2017.
SB 404 Status: Dead (Tax on Electronic Smoking Devices)
HB 1587 Status: Dead (Vehicle Ad Valorem Tax, Fuel Tax)
HB 263 Status: Dead (Tax on Medical Marijuana)
HB 1012 Status: Dead (Tax on REITs)
Choo-Choo-Choo! Using Extension and "Skim" as Bargaining Chips
In Honolulu, the 0.5% GET surcharge that is imposed in the City & County of Honolulu is set to expire in 2027, after having received a five-year extension in 2015. The City is citing massive cost overruns and asking once again for an extension of the surcharge to forever. The current version of SB 1183, as reported out by the House Finance Committee, gives tentative answers to the two variables in play: the end date is 2029, a two year extension; and the State is going to "skim" 1%, down from the 10% in current law. The Senate version of the bill, reported out by Ways and Means, ended the skim but granted no extension. The City isn't pleased by either version of the bill, and is expected to lobby hard to get something better out of conference.
SB 1183 Status: HD2 Pending 3rd Reading
Income Tax Poverty Relief, "Robin Hood" Style, Still Alive and Kicking
The Hawaii income tax now has brackets that haven't been adjusted since the 1960's. Now a single person making the same as the federal poverty line for Hawaii is taxed in not the lowest or second lowest, but the fourth tax bracket. To deal with the poor people who are getting taxed anyway, we offer a low-income household renters credit and a food/excise tax credit.
The top tax rates of 9%, 10%, and 11%, which expired at the end of last year, would be resurrected by HB 209 to pay for an extended low-income household renters credit, a renewed food/excise tax credit, and a new earned income tax credit based on a fraction of the federal EITC. HB 375 would lop off the lower brackets but leave the top rate at 8.25%, which would have the effect of saving lots of administrative costs by kicking out of the tax system a bunch of people whom we probably don't want to tax anyway.
HB 209 Status: SD1 Crossed Over to House
HB 375 Status: SD1 Disagreed by House
Obamacare Hasn't Died Yet, But Let's Clone It for Hawaii
With Republicans in control of both houses of Congress and the White House, many believed that the end is near for what we now know as the Affordable Care Act or Obamacare, although recent events in Washington, D.C. proved that the Act is still alive and kicking, for now. HB 552 will make sure that Obamacare lives on in Hawaii by requiring Hawaii health care policies to conform to Obamacare standards, and by requiring individuals to buy minimum essential coverage for themselves and their dependents. The latter requirement, the "individual mandate," will be enforced through our individual income tax system. As always, the devil is in the details. Adapting an immensely complex national Act to apply at the state level is never an easy process.
HB 552 Status: SD2 Pending 3rd Reading
Class, Why Are Real Property Taxes So Low? Your Homework Is to Fix Them!
Hawaii has the lowest real property tax in the nation. Many see that as a good thing; the teachers' union sees it as an opportunity. SB 686 would impose a hefty surcharge for education ($7.50 per $1,000 of assessed value, which is more than Honolulu's current enhanced "Residential A" rate of $6.00) on any residential realty that doesn't have a home exemption and is valued at $2 million or more. Another surcharge affects transient accommodations; that one would be $3 a day or $5 a day, imposed whether the unit is occupied or not.
Because our state constitution now gives all the real property tax to the counties, constitutional changes are needed before such a bill can take effect. SB 683 would put the question on the ballot for voters in 2018. Note that the voters only will be asked to give the Legislature the power to impose the tax, so the implementing legislation can be changed at any time.
SB 686 Status: HD1 Pending 3rd Reading
SB 683 Status: HD1 Crossed Over to Senate
TAT Sharing: Discuss It, Study It, Then …?
Prior to 2009, the TAT was levied at the rate of 7.25% on most transient accommodations. Once collected, the tax, after satisfying specified earmarks, was distributed 44.8% to the counties. A 2009 law jacked up the TAT to 9.25% on a "temporary basis." A 2013 law made the higher 9.25% rate permanent, but also changed the county share from a percentage to a fixed $93 million amount. After the counties complained about their allocations, a 2014 law required a state-county functions working group to be convened to evaluate the division of duties and responsibilities between the State and counties relating to the provision of public services and to recommend an appropriate allocation of the transient accommodations tax revenues between the State and counties, and in the meantime hoisted the fixed dollar amount to $103 million. The working group's report recommended a straight 55%-45% allocation, just about the same as it was in 2008, but the report fell on deaf ears. There were a few bills addressing the issue, but the last surviving bill to touch the TAT allocation section, SB 1290, allocates an unspecified amount to the Hawaii Tourism Authority and Hotel Lodging and Tourism Association for homelessness initiatives, and changes the county share to an unspecified amount. These issues need to be dealt with by a conference committee.
SB 1290 Status: HD2 Pending 3rd Reading
Lights, Camera, Five More Years of Action! (But Be Culturally Sensitive)
Act 88, SLH 2006, enacted the motion picture, digital media, and film production credit of 15% of qualified spending on Oahu and 20% on the other islands. The credit was increased in 2013 to 20% on Oahu and 25% on the other islands. It currently expires at the beginning of 2019. In the aftermath of a scathing Legislative Auditor's report criticizing DOTAX's handling of the credit, this year's extender bill, HB 423, extends the credit's sunset to 2024 but enacts a slew of verification and reporting requirements. The House position gives production companies the option to take a credit based on local payroll. The Senate position (in the current draft) adds cultural sensitivity requirements and requires a production getting more than $8 million of credit to agree to provide an advanced screening of the finished product in the county of the island in which most of the production took place.
HB 423 Status: SD2 Pending 3rd Reading
Batteries: Solar Industry, Hold On to Your Juice
Hawaii now offers a 35% state credit for the actual cost of a solar or wind energy system. The utilities are worried about interconnecting to such systems because their output is not 24/7 while demand is. Energy storage devices can smooth out the peaks and valleys of solar or wind power production. SB 665 would replace the current renewable energy technology credit with one that offers credit for grid-connected energy storage property in addition to solar and wind property. The credit percentage would phase down over time and sunset at the end of 2035.
SB 665 Status: HD1 Crossed Over to Senate
We Don't Care If You're Here, But We Want Your Money
SB 620, that would redefine how our general excise tax laws define "doing business," concerns a U.S. Constitutional concept called "substantial nexus." Some amount of connection between a potential taxpayer and a State is needed before the State has power to impose that tax. The Supreme Court held in Quill Corp v. North Dakota, 504 U.S. 298 (1992), that some physical presence is needed before substantial nexus can be found. Thus, many online retailers made a good business of selling into states without withholding and paying those states' sales taxes. This was all legal, they claimed, because they have no physical presence in those states.
This bill basically tells businesses, "If you make at least $_____ in sales into our state, we don't care if you have physical presence or not. We're going to go after you to collect our tax on this business activity." Many States, including Hawaii, have adopted or are considering this type of legislation, which is sometimes called "economic nexus" or "factor presence nexus," despite the possibility that it could be challenged as unconstitutional. The legislation effectively raises the ante on the online retailers, who can look forward to court battles to invalidate the laws and huge tax bills if they lose.
In addition, the bill enacts information reporting requirements that must be followed by a retailer making at least $_____ in sales into Hawaii, irrespective of whether the economic nexus threshold is triggered. In effect, the retailer would need to produce Form 1099-type reports that would go to the customers and to DOTAX. This part of the bill is based on a Colorado statute that the Direct Marketing Association challenged, the Tenth Circuit upheld, and the Supreme Court chose not to review. Direct Marketing Association v. Brohl, 814 F.3d 1129 (10th Cir.), cert. denied, 580 U.S. ___ (2016).
Some of the online retailers are starting to respond, such as Amazon, which recently announced that it would get a GET license and pay tax over to our State effective April 1, 2017.
SB 620 Status: HD2 Pending 3rd Reading
We Borrowed Lots of Money to Lend Out, But We Can't, So Let's Give It Away
GEMS (Green Energy Market Securitization) is a program that was adopted by our state government in Act 211 of 2013. The idea was to lend money at affordable rates to low-credit homeowners, renters, and nonprofits, so they could purchase renewable energy systems or other energy efficiency paraphernalia. The "securitization" part refers to the State going out to the bond market in November 2014 and raising $150 million. Principal and interest repayment and administrative costs are paid for through a monthly charge on everyone's electric bill.
The GEMS loan program is now generally regarded as a miserable failure, with the small amount of funds deployed being dwarfed by the cost of the program's administration and debt service. HB 1596 now switches gears to a rebate program, which the Hawaii Green Infrastructure Authority would administer with $_____ that would be raided from the GEMS fund. One problem with that idea, however, is that rebates aren't loans, so the transfer of $50 million won't be paid back. Bond holders might not be pleased with that.
HB 1596 Status: SD2 Pending 3rd Reading