Hawaii Court Considers Investment Property Tax on Ballot

Update (10/24/18): On October 19, the Hawaii Supreme Court removed the initiative from the ballot for vagueness reasons.

Hawaii, like many areas of the United States, faces a mismatch between housing supply and housing demand. The average rent for a one-bedroom apartment in Honolulu has risen sharply, from $989 per month in 2011 to $1,447 per month today; the average home price is $211,400, 1.3 times the average in the rest of the country. Less than 3,000 permits per year for new homes are approved, while the state estimates the need for 6,000 new units per year. Expensive properties owned by nonresidents remain a flashpoint.

It’s against this background that Hawaii voters will consider a constitutional amendment on the November 6 ballot which would authorize the state legislature to impose a surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. on investment real property, with the revenue used for K-12 education. State officials have made statements that this taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. would not apply to owner-occupied homes that receive a homeowner’s exemption, or investment properties worth less than $1 million, or nonresidential commercial properties. But the proposed constitutional language doesn’t codify any of those protections nor define “investment real property.”

The city of Honolulu and three counties have filed suit seeking to remove the initiative from the ballot, arguing that the failure to define “investment real property” makes the amendment misleading, unclear, and deceptive. The local jurisdictions say the proposal upsets a tacit agreement that the state would leave property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. to the local governments. On September 7, a judge refused to block the amendment, so the ballot campaign continues while the ruling is appealed.

Our good friend Tom Yamachika, from the unaffiliated Tax Foundation of Hawaii, wrote in May:

The amendment, if approved by the voters, does not define what investment real property is. Nor does it contain any limitations on the taxing power. Almost all the details are left up to the state legislature. For constitutional provisions this is not uncommon, but if approved it would give the genie, namely the legislature, a lot more power over revenue raising than it previously had.[…]

And even if that $500 million is raised, there are, sadly, no guarantees that any of it will end up in the classroom. About $2 billion in general fund monies are now appropriated to the Department of Education. If the real property surcharge pulls in hundreds of millions, there will be tremendous pressure on lawmakers to “repurpose” some of the $2 billion.

Arizona and Massachusetts have seen tax initiatives removed from the ballot by courts this year. We shall see if Hawaii joins them.

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