Conveyance Tax Fright

by Tom Yamachika, President, Tax Foundation Hawaii

Hawaii conveyance tax is imposed any time real estate in Hawaii is bought, sold, or leased for a term of five years or more.  Goings-on at our legislature give us some conveyance tax fright.

The tax dates back to 1967, in the first decade after statehood.  (Act 10, Hawaii Session Laws 1966.)  At the time the State, not the counties, was administering the real property tax.  Because property deeds tended not to disclose the actual sales prices (they said things like “For $1 and other good and valuable consideration” when they mentioned what the real property was being sold for), real property assessors needed data on which to make market value assessments.  So, it was decided to impose a rather small tax — it was half a mill, or 0.05 cents, per dollar of consideration.  If the property was sold for $1 million, for example, the tax would have been $500.

Over time, the conveyance tax was hiked several times, leading to the structure we have today.  Today we have tax brackets, but not with marginal tax rates like we have in income tax.  For example, a property sold for less than $1 million is taxed at 20 cents per $100 and a property sold for $1 to $2 million is taxed at 30 cents per $100.  When the sales price is $1 million, the tax is $3,000; if it’s a shade less, then the tax is a little less than $2,000.  The jumps in tax due get larger and larger with the higher tax brackets.

In this legislative session, there are two bills moving that would change the conveyance tax structure to a marginal rate, where hitting a new tax bracket would only expose the price in excess of the bracket amount to the higher tax rate.  These bills are House Bill 2049 and Senate Bill 3028.  The description of both bills contains similar language:  “Restructures the conveyance tax to a marginal rate system for the sale of properties with residential use, adjusts the tax for multifamily properties to reflect value on a per-unit basis, and applies a cost-of-living adjustment to conveyance tax rates.”

The last part of the description is already scary:  “Applies a cost-of-living adjustment to conveyance tax rates.”  Yes, we have inflation going on, and yes, that means a dollar we have today isn’t worth as much as a dollar we had last year.  I can understand increasing amounts, like fee amounts or bracket amounts, for inflation.  But rates?  There is no similar reason why rates need to be increased with inflation.  Taxing an amount higher because of inflation yields a higher tax even if the rate is the same.  So, what they are saying is that there will be tax rate hikes.  Yikes!

A second reason for dread is that both bills don’t tell us what the politicos have in mind.  The rates and the brackets in both bills are blank.  Yes, these are “Blankety Blank” bills that we have often mentioned and just as often reviled.  With the bills in their current state, it’s impossible to tell if they want to raise rates 10%, 100%, or even 1000%.  Previous versions of the bills that did have numbers in them, however, called for substantial tax hikes.  The House bill as originally introduced contains a maximum tax rate of 6%, more than four times the current maximum tax rate of 1.25%.  The Senate bill as originally introduced contains a maximum tax rate of 4.1%.  The only other version of the bill that contains numbers is House Draft 3 of the House bill, which contains a maximum tax rate of 9.5%.  Even more scary!

If either of these bills are to pass, it doesn’t seem like numbers are going to be put in them until Conference Committee, which as we know neither requires nor accepts public input.  So, we wait nervously for the door of the crypt to open and then we can finally see the monster that comes out.