Senate bills and Council of Revenues’ projections improve the State’s Financial Plan
HONOLULU, Hawai‘i - The State Senate has drafted, discussed, and voted on SB508, SB2415, SB2484, SB2489, SB2699, and SB2821 that are projected to generate approximately $72 million in revenues based on the Department of Taxation estimates. The current State Financial Plan shows the State is over spending by $208 million this fiscal year, $263.2 million in FY2020, $209.7 million in FY2021, and $105.4 million in FY2022.
The additional revenues derived from the Senate bills will be added to the general fund which will allow the State to pay for government services, debts and liabilities, and to reduce financial shortfalls for the next five years. With the Senate voting on the final measures today, combined with the updated January 8th Council of Revenues forecast, the State revenues to the general fund will increase by $114.7M.
Senate Measures
SB508 SD1 promotes tax compliance. It has become difficult and costly for the State to collect unpaid taxes from nonresident sellers of Hawai‘i real estate. This measure will allow the State to recover taxes from nonresident sellers by increasing the percentage from 5% to 9% that is withheld on the amount realized by nonresidents from the disposition of Hawai‘i real property. Per the Department of Taxation’s projections, this measures would generate $14.4 million for the State’s general fund for Fiscal Year 2019.
SB2415 SD1 raises the conveyance tax rates for residential “investment” properties with a value of at least $2 million. Per the Department of Taxation’s projection, this measure would generate $8.6 million for the State’s general fund for Fiscal Year 2019.
SB2484 SD1 provides the State to capture some of the money that certain residents will no longer be required to pay to the Federal government and redirect that money to the State. The additional estate tax revenues could be used to pay for priorities that the Federal government will no longer be able to support due to the significant reduction of estate tax revenues. Per the Department of Taxation’s projection, this measure would generate $900,000 for the State’s general fund for Fiscal Year 2019.
SB2489 SD2 The tax formula on time shares has not been updated since its establishment in 1998. This measure updates the formula for the amount of transient accommodations taxes to be collected from time shares and is projected by the Department of Taxation to generate $20.2 million for the State’s general fund for Fiscal Year 2019.
SB2699 SD2 Transactions regarding the furnishing of transient accommodations are increasingly conducted over the internet which has resulted in the State not collecting the full amount of transient accommodations taxes. This measure establishes a process for online platforms to pay the transient accommodations tax on accommodations booked through their websites and imposes the transient accommodations tax on resort fees. Per the Department of Taxation’s projection, this measure would generate $19.4 million for the State’s general fund for Fiscal Year 2019.
SB2821 SD1 This measure is the annual conformity measure submitted by the Department of Taxation. This measure maintained current State law in numerous key areas. For example, the State's current allowance of individual itemized deductions will be maintained to ensure that individual taxpayers are not burdened with increased income tax obligations. Additionally, per Department of Taxation’s projection, this measure would generate $9.2 million for the State’s general fund for Fiscal Year 2019.
Council on Revenues
At its meeting on January 8, 2018, the Council on Revenues raised its forecast from 4.3% to 4.5% for Fiscal Year 2018. This 0.2% increase is projected to add an estimated $12 million in tax revenues to the State’s general fund.
State Financial Plan
Per the Department of Budget and Finance's General Fund Financial Plan, the State overspent by $134 million in Fiscal Year 2017. This year, the Governor's Supplemental Budget request totals $7.4 billion in general funds, of which $3.6 billion is already dedicated to fixed costs.
In addition, the State Financial Plan will be short an additional $33 million the first year, and $67 each year thereafter since no revenues are expected from SB2963 SD1. This increases the
overspending amount which the legislature will be expected to identify additional revenues or make cuts to cover the additional shortfall.
For Fiscal Years 2018 – 2022, the financial plan shows a total of $786.3 million in overspending and it is not until Fiscal Year 2023 that the State will show a surplus.
The State continues to tackle it's increasing unfunded liabilities. In the early nineties, the State stopped contributing to the Employees' Retirement System (ERS) and as a result, the State's current portion of the ERS unfunded actuarial accrued liability is $8.94 billion. Similarly, prior to 2014 the State did not pre-fund the Employer-Union Health Benefits Trust Fund (EUTF) and now the EUTF unfunded liability has grown to $9.314 billion.
Possible Revenues
In addition to efforts to decrease spending, the following measures are estimated to generate $72 – $136.7 million in additional revenue per year for Fiscal Years 2019 – 2024. These measures have passed third reading in the Senate and will be sent to the House for further consideration. These measures are not included in the Financial Plan, due to non-voluntary compliance and unresolved Federal legal issues. However, these issues may be resolved in the near future by U.S. Supreme Court.
SB2514 SD1 and SB2890 SD2 Many local brick-and-mortar businesses are at a disadvantage with online merchants. To ensure fair competition among all businesses and fairness, this measure would require any online merchant that sells goods and services to residents of the State to pay the general excise tax. Up to $9 million would be generated for the State’s general fund for Fiscal Year 2019 per the Department of Taxation’s projection.
SB2963 SD1 will strengthen country enforcement laws and ordinances relating to vacation rentals. Furthermore, this measure establishes a process for online platforms to collect and remit to the State the transient accommodations tax on vacation rentals. Per the Department of Taxation’s projections, compliance and participation would generate up to $10 million for the State’s general fund for Fiscal Year 2019 and up to $20 million annually for the outyears.
Reallocation of the Transient Accommodation Tax
While SB2224 SD2 will not affect the State’s Financial Plan, the measure will reallocate transient accommodations tax to departments with a mission that supports our visitor industries and economic development, as follows:
$1,000,000 shall be allocated for the operation of a Hawaiian center and the Museum of Hawaiian Music and Dance at the Hawai‘i Convention Center; $16,500,000 to the Department of Business, Economic Development, and Tourism to be expended for economic development initiatives and programs;
$3,500,000 to the Department of Education to be used for a grant program for initiatives and programs related to hospitality and tourism industry careers;
$7,891,000 to the University of Hawai‘i System for academic programs relating to hospitality and tourism industry career pathways;
$3,000,000 to University of Hawai‘i athletics for student athlete travel;
$9,608,554 to the Department of Land and Natural Resources to be used to support efforts to manage, improve, and protect the State's environment and address the impact of tourism on the State's natural resources;
$8,000,000 to the counties to be expended to ensure the safety of visitors to county parks and beaches; and
$8,000,000 to be expended on grants, pursuant to Chapter 42F, Hawaii Revised Statutes, including but not limited to Hawaiian cultural initiatives, community programs, product development, and tourism related grants, as determined by the legislature.
“The State needs to practice more fiscal restraint, pursue public private partnerships, and identify more efficiencies so it can live within its means. We still must provide needed services and invest in economic development and job creation for our community,” said Senate Ways and Means Committee Chairman Donovan M. Dela Cruz. “We also need to anticipate expenses for a growing aging population, so the Senate is being more proactive in our handling of the State Financial Plan rather than reactive. We can’t just keep kicking the can down the road.”
# # #