Legal, practical and political problems appear to be piling up in the path of a controversial proposal to impose tax surcharges on hotel rooms and residential investment properties to raise more money for public education.
House Finance Chairwoman Sylvia Luke said Monday there is disagreement within the state House and between the House and Senate over how large the property tax surcharge should be, which will dictate how much money the initiative would actually raise for Hawaii’s public schools.
But before any sort of property tax surcharge can be imposed, the voters would need to approve an amendment to the Hawaii State Constitution, and Luke said legal questions have surfaced about Senate Bill 683 that would put the proposed constitutional amendment on the ballot.
Looming over both of those concerns are the worrisome political optics of having lawmakers advance two broad-based tax increases in the same year. Lawmakers are also hotly debating a plan this year to extend the half-percent excise tax surcharge on Oahu to bail out the city’s rail project.
Those factors are complicating the outlook for the education surcharge as lawmakers begin a series of critically important conference committee meetings over the next two weeks. Friday is the deadline to notify Gov. David Ige of the final language to be included in any proposed constitutional amendments for this year.
Senate Ways and Means Chairwoman Jill Tokuda said the voters are warily watching the proposed education surcharge as well as other proposed tax increases, including measures the city is considering that would boost taxes or fees.
“It’s difficult to consider all these broad-based tax increases in tandem because communities are really starting to feel the fatigue of all these increases,” said Tokuda (D, Kailua-Kaneohe).
The proposed new education tax has gotten as far as it has in large part because it was conceived and promoted by the politically potent Hawaii State Teachers Association, which has rallied the state’s teachers to support it.
The teachers’ union is in contract negotiations with the state this year, and has proposed pay increases as well as caps on class sizes and extra support for special education teachers to ease their workloads. All of that costs money, and HSTA has argued for years that the state does not devote enough resources to Hawaii’s public education system.
On Feb. 13 the union rallied more than 4,000 teachers and their supporters in a demonstration at the state Capitol to pressure lawmakers to provide raises for teachers and more funding for education. HSTA has followed up with an intensive lobbying effort.
HSTA President Corey Rosenlee says voters should be given the opportunity to decide the issue.
“This is a constitutional amendment that people will get to vote on. This gives the people of Hawaii the opportunity to decide: Do they want to fund our schools and do they want to fund our keiki,” Rosenlee said.
“If the voters don’t want this, they’ll vote it down. But from what we’ve seen, many in the community deeply believe that we need to be able to fund our schools properly. At the end of the day, it’s about letting the people vote.”
He said the union set its sights on property taxes in part because Hawaii, which is the only statewide school district, is the only state that does not use property taxes to finance education.
The state already has the highest income tax in the nation and the city is already tapping into the general excise tax for rail, Rosenlee said. HSTA was unsuccessful in its effort to raise the GET to create a dedicated funding stream for public schools. This year the union aims to raise about $500 million a year with the new property tax surcharge, he said.
HSTA has 13,500 members and is a power to be reckoned with each campaign season, but the teachers’ proposal has some formidable opponents.
Property taxes are the largest source of revenue for the city and counties, and officials from all four counties strongly oppose HSTA’s proposal. Honolulu officials point out that education is a state responsibility, and expressed concern that the bill “encroaches into the city’s only taxing authority.”
The teachers’ proposal “would obviously limit county options and make it even more difficult to balance our budgets,” contended Hawaii island Mayor Harry Kim. “Therefore, we have to jealously guard this taxing authority and ask that you not breach this line of authority.”
Rep. Luke said there are also major divisions within the House over the proposal. Lawmakers disagree about which properties should be taxed, and also about “what is the comfort level in taxing property to pay for education.”
Lawmakers are advancing a separate measure to complement the proposed constitutional amendment that is supposed to spell out who would pay the new tax, who would be exempt, and how the new constitutional language would be implemented if the voters approve it.
HSTA’s original proposal would have levied the education surcharge on all residential investment properties, but the union later suggested the tax could apply only to properties worth more than $1 million. The Senate amended the measure to impose the surcharge only on investment properties worth more than $2 million, while the House position is unclear.
Taxing less-valuable investment properties as HSTA proposes would require that more property owners pay, and would generate more tax revenue for education. But city officials warned lawmakers that would trigger an increase in rents that would aggravate the shortage of affordable rentals in Honolulu.
But taxing only expensive properties would generate less money for education. Luke said that if the revenue from the proposed property tax surcharge for education is going to be relatively small — such as $30 million to $50 million a year — then lawmakers should simply appropriate that amount from the state general treasury and add it to the education budget. A constitutional amendment isn’t necessary to do that.
With lawmakers still debating key components of the tax proposal, Luke questions whether this is the right time to put the issue on the ballot for voters.
“If we don’t come to an agreement, is it still fair for us to put the constitutional amendment on the ballot without the statutory portion, which is going to detail out what is the surcharge and (what the) property tax will be used for?” Luke asked.
She also cited legal concerns about the proposed constitutional amendment.
The state Constitution requires that any proposed amendment be approved three times in both the House and the Senate. Since lawmakers amended the measure as it progressed through the Legislature this year, Deputy Attorney General Holly Shikada advised lawmakers that “an argument could be made” that the exact wording of the proposed constitutional amendment wasn’t approved three times in each chamber.
Lawmakers alerted HSTA to the issue, but Luke said the union’s lawyers believe the proposed constitutional amendment would withstand a legal challenge.
Hotel surcharge issues
The visitor industry, meanwhile, is worried about another portion of the teachers’ proposal that would impose a daily surcharge of $3 or $5 per day on all Hawaii hotel rooms. Mufi Hannemann, president and CEO of the Hawaii Lodging & Tourism Association, said the issue “comes down to fairness and equity.”
More than half of all hotel room taxes collected by the state today are deposited into the state general treasury, and the industry believes a share of that money is likely already going to support public education, Hannemann said.
If lawmakers want the visitor industry to provide more support for education, Hannemann suggests the state go after tens of millions of dollars in uncollected hotel room taxes owed by transient vacation rentals that book through online platforms such as Airbnb.
Normally a proposal as far-reaching and complicated as the HSTA plan would take years to shepherd through the Legislature, but Tokuda said she is not ready to give up on the bill for this year.
“I think in this building you just never know what takes a year and what takes 30 years” to pass, she said.
Star-Advertiser education reporter Nanea Kalani contributed to this report.