BY LOWELL L. KALAPA – A few weeks ago this commentary asked what is a “fair” tax and the conclusion seems to be that “fairness” depends on a person’s perspective, usually imbedded in the belief that a “fair” tax is one that someone else pays. But what about knowing exactly what each of us pays for the public services provided by federal, state and county governments?
One of the more obvious strategies was the adoption of the transient accommodations tax (TAT) when lawmakers were presented with the opportunity by the hotel industry in the mid-1980s. Having failed to persuade the Legislature to fund the construction of a convention center, hoteliers came with hat in hand asking the Legislature to impose a hotel room tax of 2 percent and to earmark the receipts for the building of a convention center. When the lawmakers turned out the lights on that session, the rate they had adopted for the TAT was set at 5 percent and none of the receipts were earmarked for the building of the convention center. For nearly five years, they remained receipts of the general fund.
Since lawmakers reasoned that the tax would be paid by the visitor, their constituents wouldn’t complain unless, of course, their constituents visited a Neighbor Island and had to stay in a hotel. But that number was small by comparison to all resident voters. What lawmakers won’t admit is that dollars paid for the TAT on the rental of a hotel room are dollars our visitors will not spend on other purchases like an aloha shirt or a catamaran ride. This is because Hawaii’s visitor market is comprised largely of leisure visitors, and these visitors are usually on a budget, spending discretionary dollars of their own. Thus, any large tax bites mean they will have less dollars leftover in their budget to make discretionary purchases. So, the local small business sees fewer sales, which, in turn, hurts his employees who are constituents of those elected officials.
Probably the most amusing is the latest fiasco in Honolulu where assessors reclassified property that had been assessed as residential property to the category for commercial and industrial property because they were in commercial and industrial zones. Apparently no one noticed that this happened when their assessments were received in January, so when the owners received the tax bills last month they found that their real property tax bills had quadrupled from the year before.
While many of these owners stressed over this discovery, what this action did highlight is the disparity between residential and non-residential property tax rates. Yes, in Honolulu, as well as in all the other counties, the non-residential real property tax rates are anywhere from three to four times higher than the rate imposed on residential property. And while homeowners and landlords may rub their hands with glee, elected officials must realize that those commercial and industrial property owners have to recover the higher real property tax burden and the only way that they can do that is to either raise their prices to their customers or cut back on their expenses including the cost of labor, payroll and benefits.
So in the long run it is the voting constituents of the local elected officials who end up paying as the cost is passed on in higher prices or less jobs and/or lower wages. But what this hiding of the true tax burden on individuals and families allows elected officials to do is to continue spending on programs and services while looking like they are holding the line on real property taxes or so it would seem to homeowners and landlords.
If, in fact, the same real property tax rate was levied across the board with residential and non-residential property owners paying the same rate, then every taxpayer would know how much elected officials are spending to run county government. At that point there would be real pressure on elected officials to curb spending as homeowners and landlords would see their real property tax bills spike. Thus, shifting the real property tax burden from residential to non-residential property is certainly less than honest and certainly is not transparent to the average real property taxpayer.
If elected officials just wouldn’t resort to these smoke and mirror tactics, maybe their constituents might actually trust them. Until then, most voters will continue to cast a cynical eye.
Lowell L. Kalapa is the president of the Tax Foundation of Hawaii.