Light at the End

by Tom Yamachika, President, Tax Foundation Hawaii

Earlier this year, about two months ago, we wrote about tax liens and a bill that was advancing in this year’s Legislature to confirm that there was a light at the end of the tunnel for tax debtors. 

Before 2009, Hawaii had no statute of limitations on the collection of taxes.  If it was assessed, it could be collected at any time.  It could be 10 years later, 20 years later, 50 years later.  The debt did not go away.  Then, in 2009 a law was enacted giving collectors only 15 years to beat the money out of any tax debtors.

Exceptions were provided for periods in which the taxpayer has agreed to extend the period, periods in which an offer in compromise was pending, periods where the taxpayer’s assets were under court control, periods where the taxpayer was out of state for more than six months, and, under a bill that has been passed by the Legislature but not yet signed by the Governor, periods in which the tax liability was being appealed.

Debts assessed before July 1, 2009, were supposed to roll off after June 30, 2024.

There were other exceptions and ways around the deadline as well.  For example, the Department could sue a taxpayer before the statute of limitations expired and obtain a court judgment against the debtor.  Judgments last for ten years once entered, and can be renewed for another ten years.  Or, under a 2022 law, the Department can ask the court to “convert” its lien to a judgment, which, again, would last ten or twenty years. 

(We imagine that the Department is thinking that the conversion process could be done without notice to the taxpayer, but we wonder if the courts will push back on that given the obvious Due Process concerns.)

Even with these exceptions and workarounds, the Department was still in denial.  They said that the 15-year period applied only to new collection actions, so “passive” collection actions like leaving ancient liens on the books and denying tax clearances for moldy oldie debts were still fair game.

House Bill 1173, though, sought to change that thinking.  It provided that the Department had to release a lien where the underlying debt was not enforceable due to lapse of time.  That bill passed the Legislature, and Governor Green signed it on May 19.  It’s now Act 68 of 2025.  The law is effective on Jan. 1, 2027, to give the Department time to figure out how to implement it, but the handwriting is now on the wall.

And even without this new law, courts are giving some indications that there is indeed light at the end of the tunnel.  In a recent case in the Bankruptcy Court here in Hawaii, a debtor asked the court to disregard an old state tax lien.  The Department argued that the 15-year period barred court proceedings in state court but could still be asserted in federal bankruptcy court.  The Bankruptcy Court, however, sided with the debtor:  “DoTax argues that the expiration of the fifteen-year period does not extinguish the tax debt,” the court’s order said.  “This may or may not be true, but it is irrelevant.  Under the Bankruptcy Code, a claim that is “unenforceable” must be disallowed, even if the claim continues to exist in some metaphysical sense.”

Now, don’t get us wrong.  People should pay what they owe, and tax debts are no exception.  But our lawmakers have decided that there is a point at which enough is enough, and beyond that point people should be allowed to get on with their lives without the albatross that has been hanging from their necks.