Commercial Real Estate, Investment

Lawmakers target real estate taxes

The Hawaii State Legislature has turned to the real estate industry in its search for additional revenue, proposing to levy a special 1 percent general excise tax on businesses that sell real property.

The proposed tax, which would take effect July 1 and sunset after five years, would be on the gross proceeds of a sale, minus a real estate salesperson’s commission and conveyance tax, and would apply to both commercial and residential properties.

The money generated by the proposed tax would be used to pay for infrastructure projects needed for land development.

It’s one of several tax-increase proposals lawmakers have floated this session to try to close a $1.2 billion shortfall in the state’s budget, including a 1-percentage-point across-the-board increase in the G.E.T. Both G.E.T. increases were sponsored by House Speaker Calvin Say, D-St. Louis Heights-Wihelmina Rise.

Real estate transactions currently are taxed by the state through the conveyance tax, which already has been used as a source of extra revenue.

Lawmakers last year took a three-tiered tax on real estate conveyances that stopped at 30 cents per $100 for purchases of $1 million or more and created a seven-tiered system that tops out at $1 for every $100 of purchases of $10 million and above for commercial properties.

Another bill this year, sponsored by Rep. Rida Cabanilla, D-Waipahu-Ewa, would boost the conveyance tax on the sale of “luxury homes over $700,000” by 10 percent to create a special fund for purchasing and maintaining state parks for the homeless on Oahu.

House Bill 2488 would add another tier to the conveyance tax rates that would tax homes selling for between $700,000 and $1 million at a rate of 22 cents per $100, instead of 20 cents per $100.

Under the conveyance tax increase that took effect July 1, 2009, Alexander & Baldwin had to pay $500,000 on the recent $50 million sale of the Mililani Shopping Center, instead of the $165,000 it would have paid under the old tax rate.

The proposed 1 percent G.E.T. on the A&B transaction, minus the conveyance tax and sales commissions, would add at least an additional $490,000 to the landowner’s closing costs.

The proposed measure, House Bill 1953, cleared the water, land and ocean resources committee last week unamended and is awaiting a hearing in the House finance committee. The overall G.E.T. increase, House Bill 2876, also is awaiting a hearing by the finance committee.

The real estate G.E.T. bill appears to have little, if any, support.

State tax director Kurt Kawafuchi, who testified against the measure, said it would bring in only about $16.5 million in estimated revenue and would drive up the cost of property.

“In a state with some of the highest real property prices, the [tax department] cannot support a measure that only makes taxes higher,” Kawafuchi wrote.

The Tax Foundation of Hawaii also made that point, adding that any costs added to a transaction will no doubt be passed along to buyers in what is already a stagnant market.

“Inasmuch as this bill probably is aimed at large landowners/developers, the cost of the tax will exacerbate what is already a very expensive market for real estate,” the foundation said in testimony.

The Tax Foundation also noted that the amount generated by the tax would fluctuate depending on sales and property values, which would make it an unreliable source of revenue.

“In addition, if this measure is adopted, it may open the door for other general excise tax impositions and additional rates which may result in a convoluted general excise tax system,” the foundation testified.

The Hawaii Association of Realtors’ Craig Hirai pointed out that the new tax, when added to the conveyance tax, amounts to a 626 percent increase in the tax on a $300,000 condominium, or an additional $2,816.

That money would get passed on to the home buyer, including first-time home buyers, who would need to come up with the additional amount in cash at closing.

The 1 percent G.E.T. would end up increasing the cost of affordable housing by taxing the sale of the land, and then the sale of the housing — costs that would be passed along to buyers, said Dave Arakawa, executive director of the Land Use Research Foundation of Hawaii, whose members include landowners and developers.

Arakawa testified against the proposed G.E.T. and was preparing to testify against the 10 percent increase in the conveyance tax, which was being heard by the House committees on housing and water, land and ocean resources on Wednesday.

“They’re not going to eat that tax, they’re going to pass it on,” Arakawa said of the sellers. “So, the cost of the house gets passed on. It’s counterproductive.”

Source: PBN