 Maui's new short-term rental property tax. Oh my goodness. Okay, here we are on Tom Yamachika talking tax. Tom Yamachika is president of Tax Foundation of Hawaii. I'm Jay Fiedel. This is ThinkTek, and we're talking tax with Tom. How are you, Tom? Nice. Great, thanks for having me on the show again. Absolutely. So now we're gonna talk about Maui. You're taking a short trip over to Maui, to the county council, I suppose. Yeah, some tax payers on Maui are getting a nasty surprise this year, because they didn't do anything and their real property tax doubled. Oh, geez. Yeah. Actually, yeah. Or maybe more than doubled. Is what a given homeowner pays in Maui more than what a given homeowner pays in Oahu? Well, it depends on what kind of homeowner you are, because in Maui, there's a three-tiered system of owner-occupied tax, right? With the rates going from 251 to 261 per thousand of taxable valuation, which is about a dollar lower than what we have here in Honolulu. Okay, but if you are in a second home or renting your unit, there's a classification called non-owner-occupied, where the rates go from 545 to $6.90 per thousand. So a little bit more than double the owner-occupied rate, but there's more. For short-trip rentals, the rate is 1108. Whoa. Yep, which is slightly higher than hotel and resort. Whoa. And it's actually the second highest property tax rate they have on Maui. The highest rate is timeshare at 1440. That's like four or five times what an individual rate would be for a resident in the property. Yeah, it matters a lot if you own your home and you're living in it. Okay, so what happened? Let's talk about not only how this works, but how it came to pass, so to speak. Okay, what happened was there was a, what I call a flash change in law. I'm gonna say that because it was a pair of bills, known as bills 129 and 130, they were introduced on November 20th, 2020 past the council on December 4th, and were signed into law by Mayor Victorino the very next day. So November 20th to December 5th is like two weeks. Is there a reason for a rush? I'm not really sure, but it looks very suspicious. And what that did was it said that if you have a property in a district that doesn't ban short-term rentals, then as long as you don't live in it, you'll be taxed as a short-term rental. So previously, if they had a long-term rental in there, it would be classified as non-unoccupied. If you lived in there some of the time, it was classified as non-unoccupied. Okay, no more. It now changes from non-unoccupied to short-term rental. And with the effect that the person's tax may double or even a little more maybe. Well, it's just an immediate reaction, Tom, is that if I have a piece of geography that doesn't ban short-term rentals. And if I am not living in this property that I own in that geographical area, my tax rate is gonna go way up. So A, this requires me, I mean, as an economic matter, or at least it encourages me to actually use the place as a short-term rental, even if I would not otherwise do that. Even if I would otherwise, for example, do a long-term rental. So it sort of forces me, incentivizes me to bring short-term rentals into my property. And the other possibility, the other idea though is that- Or you live in there. Well, yeah, but I'm assuming for this discussion that I'm living somewhere else. Okay. The other possibility is that, gee, this is, if I don't have it rented, but I am charged tax on the assumption that it is rented, I'm really losing money. It's terrible. And so what I do is I get out of there, I sell that property. And in the end, let me just throw this actually, you probably analyzed this. At the end, I'm gonna wind up with a patch of land, this place where short-term rentals are not banned, where everybody is a short-term rental. That this incentivizes short-term rentals. That's the back of it. It incentivize short-term rentals so that the square I'm describing, the geographical area I'm describing will all be actively short-term rentals in order to respond to this bill that was passed by the Maui County Council. So now I have a kind of ghetto of short-term rentals. Is this something you thought about? Well, that I think is what they intended. Now, normally in real property tax, when you have zoning, the tax that applies to your property, short-term rentals or no, is usually based on the highest and best use that's allowed in your zoning. So if, for example, you had a watercress farm in an industrial area that's zoned for strip malls and so far, I'm thinking like Pearl Ridge. You're gonna be taxed on that area as it was commercial. Same as commercial buildings. You can't get out of your property tax classification if your zoning permits a higher and better use by doing something else on your property. That's called highest and best use concept and that's familiar to property tax. Well, it's just something where me as the owner of the watercress farm could seek a variance. I'm not sure that would matter because a commercial is allowed by your zoning and you're so your tax is commercial. It doesn't matter what you do. You're right, I'm thinking about it now. A variance is to allow for a non-conforming use, a use that is maybe too industrial in a residential area, that kind of thing. That would be a variance. But it would not be a variance to allow a watercress farm in a shopping center area and that would be backward. Okay, good. Yeah, so when you read the FAQ page at the real property tax division's office, that's just today, you know, we're just doing what everybody else does. We're adopting the highest and best use valuation concept and that's how we're doing it. And everybody's kind of like scratching their heads at that because it's kind of, well, why the heck did you need all these lightning fast change in the ordinance to do what you all were saying was a common thing all along? Okay. And I think that part of the problem may be a fiscal. You don't have money and they need to raise money. As you may remember, the normally counties get part of their budget from the state in terms of shares of transient accommodations tax, right? When the pandemic happened, Governor shut off the spigot all the way. No more dollars to the counties, period. Now that may have restarted, I think June 1st, but for a very long while, it wasn't happening. And... But can you look back? Can you say, wait a minute, you know, you didn't give us X millions of dollars during the time you shut it off, you just took our money. How about coughing it up? Isn't that possible? Apparently not. The counties never had any entitlement to it. It was just something that the legislature gave them. And, you know, what the legislature giveth can be taken away. By the governor. That troubles me, that troubles me. If the legislature gave it and set it up that way, I think I suggest to you it wasn't entitlement, but here we have the entitlement is taken away by somebody who didn't award it in the first place. And the reversal, his action was not by statute. It was just by proclamation. He doesn't have the right to do that, does he? He says he does under the governor's emergency powers. And, you know, I had some trouble with understanding why, you know, emergency powers gave him the right to do that. You can think about it as well. The state government needs money and they kind of make a decision, well, they can't afford to share this TAT anymore, even though the TAT is not coming in. So it's probably a moot point anyway. But the governor said, okay, well, I can shut off all the earmarks. And that's what he did. In fact, if I think it was May 2020, when that happened. I really think it's a questionable decision. I mean, I know it may be, you know, Pyrrhic in the sense that there was not a lot of TAT anyway, but still as a matter of principle, I don't think he has the power to do that. I mean, he's power doesn't let you do whatever you want than a given Tuesday. Well, that's what we said. When it came to like shutting off the public records laws, for example, shutting off the collective bargaining laws, you know, we had loudly complained about that because we were kind of getting into an environment where we didn't have laws anymore because all of them were suspended. Yeah, where does it end? Where does it end? Before you know it, you're talking about constitutional rights. Well, the governor's proclamations, at least up to now have been, you know, with a 20-page single space list of laws that are suspended and one sentence can basically rip up an entire chapter of the interest. Did anybody take them to court over this? Somebody did and they lost, but I don't think they were challenging the right provision. I mean, like for a provision like the public records laws, okay, what does this have to do with us being in an emergency? Okay, the governor can suspend laws to streamline operation and alleviate burdens and that kind of thing, but you're absolutely right. He doesn't have the right to do anything. He darn pleases. Even the suspending of the Freedom of Information Act, as I recall, the argument there was that we don't have enough people to respond to Freedom of Information Act requests because, you know, our staff can't come in or something along those lines. At the same time, don't you remember there was an issue about whether one department, the staff of one department could be brought in to do the work of another department and the union said no and he went along with that. So it was a self-created problem. He could have had the staff to respond to the FOIA request, but took steps to, you know, make it impossible or- Well, not only that, but he also suspended the collective bargaining law. So the union coming in with this argument, you know, they could have been told, guys, I suspended that law. So you really don't have an argument. You know, it distracts me. I mean, I don't want to put a value on this, but it strikes me that we did not, legally speaking, we did not do very well through the period of COVID. Would you agree? I would agree. I mean, there was a lot of, you know, unnecessary reactionary knee-jerk, you know, statute suspension to what end I don't know. It was kind of, I think part of a, you know, the outcome of a session where the governor asked everybody, well, you know, which laws bother you? And they said, okay, this one. And they go, okay, we'll suspend that. I'm going, but that's not what the emergency power statute is for, okay? The emergency power statute is so you can respond to an emergency. With emergency steps. Right. So anyway, so it sounds like whatever happened at the gubernatorial level, the county of Maui was strapped. Well, yes, they were. When they looked at it, you know, recently, December, whatever. Yeah, I mean, not only did they have this spigot turned off by the emergency proclamation, but now with, I think it's what Senate, Hospital 864, there's a bill that basically proposes to give the counties the right to impose a surcharge on the TAT, but it basically says we're going to stop sharing permanently. You mean in violation of the state statute? No, it amends the state statute. Okay, okay. This is in the legislature. Okay. Yeah, so that's one of the bills that's on the governor's desk. A, it would shut off the spigot to the counties permanently, but B, it would say that they can add their own surcharge to the transient accommodations tax, but without any help. So my guess is that he'll sign that. Why? For the same reason, fiscal purposes, the state will get more money. The counties will be on their own, but they have the prospect of getting more money too. So everybody is happy except the taxpayer. Well, and the counties, the county is screaming bloody murder. Because? Because, you know, it's unlike the GET surcharge. In the GET surcharge, the state collects the money, turns it over to the counties, right? Okay. This one, there's no help. So the counties have to set up their own tax office to monitor, enforce TAT, the TAT surcharge. Oh, okay. I see. Yeah, so it ain't cost a millions to do that. Yeah, so they need to get staff hired, they need to get staff trained, and that's just the start. At the end of the day, you have a redundancy. You do. And that's, again, a reason why the counties are screaming bloody murder. They are stridently opposed to this. The hotel industry is opposed to this. Because of, of course, the prospect that we'll go from, you know, 10 and a quarter percent TAT to 13 and a quarter percent. And that's before the GET is added on. So what's interesting, though, is that the TAT issue, and this is good that you mentioned, the TAT issue is a tax that the counties have to pay for the tax that the counties have not had the infrastructure, the apparatus to collect, right, right now, up till now. But the real property tax, which is this strange bill you mentioned in Maui, the real property tax has the infrastructure. It's already systematized. Yeah, the counties didn't have it from the beginning, of course, but they wanted the independence, the lobby, the, you know, the 78 Con Con, to give them that. And the Con Con gave them that. And so, you know. Now, today, they have the ability to collect tax themselves. And if it's a matter of interpretation or rate, they can do that within the existing infrastructure, right? Right. It's not hard. And there's a second issue. And the second issue is that apparently, according to the county auditors report, a number of the hotels came to the administration and said, my God, our business is going through the floor. Can you give us a break on valuation? And they did. It actually went down. The valuations went down, yes. How do you do that by county action? Yeah, you convinced the appraisers that the value of XYZ hotel isn't as isn't as high as it was the previous year, which, and there's a credible argument for that because there's no tourists coming. So how can you, how can you, you know, make it as a hotel? But wait a minute. I mean, this is, this is not a matter of county council action. It's not a matter of the mayor. It's just a matter of talking story in the back room kind of thing. Can you give your assessors to give us a lower rate? The mayor may have approved it. The mayor is in charge of the assessing agency. So he probably would have had something to do that. So, I mean, is it a, I mean, how much transparency is this? So is it a memo? Is it a proclamation? No, none of the foregoing. None of the foregoing. Just talk story, that's all. Yeah. And then apparently it bothered the county auditor enough so he wrote about it. And that's kind of where I'm getting that information from. So, there was, you know, some devaluation of the hotels done by administrative fiat. Okay. And my question is, well, who else got the opportunity to come down and, you know, talk story with the appraiser and say, well, geez, you know, we've got no tourists coming. So my property value is, you know, a whole bunch less. Yeah, what about a homeowner who lost his job? Yeah. I'm troubled by this. It actually sounds that Cyrus Vance would be interested. Hey, maybe. But that's what happened. We're talking here about, this is what happened. Very little of it, I think, hit the press. So that's why we're talking about it here today. Well, that's an underlying question here. You know, you have this talk story thing about lower valuations, which is, it really sounds like Trump. And then without any transparency, without any public announcement, even with a concern to the concern of the state auditor. And then you have this strange bill that pops up from nowhere, which essentially increases the individual taxation of a person who has a short-term rental property and a given sum. I mean, it sounds terribly unfair. And what makes it even more unfair, I think, is that this short notice bill, the quickie bill, nobody explained. Did anybody try to explain? Did anybody ask for an explanation? I didn't see one. I mean, it may have gone through so quickly that nobody had the chance to. And that's one of my concerns. I mean, how can you have appropriate public notice and input when, you know, start to finish is two weeks? I mean, that's very hard. The decision to, you know, go forward with the bill, sign it, you know, that must have been done way before the bill was ever introduced. I think they thought they were being clever. Because, you know, there's an enforcement problem with short-term rentals. How are you gonna know that to taxpayer A, real property owner A, who lives out of the district, the ghetto, so to speak, is involved in a short-term rental? Is there a reporting requirement or can he just do it and not say boo about it? This way, arguably, the county doesn't have to get into that enforcement issue. If you own it and you don't live there, then you must be using it, or you could or should use it as a short-term rental. Yep, that's... Would you oppose that on a, you know, assuming it wasn't a surprise bill like this, would you agree that that's a legitimate reason? Yeah, it does simplify enforcement. That's what it does. But then again, you know, you have to kind of hear what the stakeholders have to say. You need to consider the equities, balance the values. No indication that any of that was ever done. Well, desperate times result in desperate measures, don't you think? And the question I put to you in a larger sense is, are we in desperate times? Ah, well, I think it's in the eye of the beholder, but I think some people do think we're in desperate times, and that's why we're coming into doing stuff like this. I personally think that, yeah, we had a bad catch and we're kind of getting over it, but does that require like the wholesale suspension of laws? I don't think so. What really troubles me about it is that when you have this, you know, suspension slash emergency milieu, agencies kind of pick and choose what they're following and what they're not. And there's room for a whole lot of arbitrariness. Are we a government of laws or of men? Apparently, until we get into desperate times, then we're not. But you know, just focusing on this Maui County, you know, short-term rental tax bill, what troubles me is the notion that Maui County finds itself in desperate straits. And certainly the state is in desperate straits, but the state has this, you know, preemptive power. And it did promise and agree and created entitlement for the counties and then decided the governor by himself decided that it was not gonna follow through on that because we were in desperate times. What troubles me about it, Tom, and I really be interested in your opinion is who's to say the counties are not in desperate times? Is the state more important than the counties? The state is saying, your problem, boys, we're not gonna help you out. We don't care what happens to you. We're cutting your funding. Go find a way. And that's very troublesome. It is very troublesome. I personally thought that one or more of the counties would have gone to court and said, you know, come on guys, this is not an appropriate use of the governor's emergency power. Where is the connection to the emergency? I mean, this is just a money grab. That's all it is. That's what it is. It sounds to me like ultra virus because there wasn't entitlement and because there's no good reason to cut it off. So you just keep the money. Why are you keeping the money? Because I can. That's why I'm keeping the money. So sue me. That sort of thing. I really think- But nobody did. Yeah, nobody did. Nobody did. So we were all in deer in the headlights not knowing what to do. And I like to ask you this other larger question is, have we learned anything? I don't think so. I mean, it doesn't look like it with, for example, the current state of the public records laws. We're kind of back to where we were in the 1950s where nobody was really following anything. And agencies were saying, oh yeah, thank you for coming in the door. And then just kind of like, crumpling the request and throwing it in the trash can. Well, in my practice experience, if you wanted information from the state, yes, there was a statute that allowed freedom of information and put an obligation on state agencies to respond, but they never did. And when you caught them off the record, they would say the only way you're gonna get this is to us. So even for the most modest freedom of information act request, a lot of people had to go to court and sue them. That's expensive and time consuming and unproductive really for everyone, including especially the taxpayer. So a couple of years ago, the foundation got involved in a case where it involved like revenue estimates. The requester had gone to the Office of Information Practices and said, hey, this is public information. Office of Information Practices agreed and they wrote an opinion saying, go disclose this. And then the Department of Tax appealed it to circuit court. They said, no, we're not gonna do that. We don't think you're right. We, they lost the appeal. Wasting everybody's time. So the other thing that comes out of all of this is, okay, so we had emergency proclamations left and right. Not one, but a series. Not one area of law in the state, but many areas of law, some really questionable as to whether they were the appropriate subject of emergency. So now it is now, and you can quote me on this, it is now June of 2021, long after these proclamations began, have any of these proclamations been reversed? And if so, which? And if so, why those, not the others? And are there any left standing? Well, the way the proclamations worked is each one kind of built up on the last. So everything in like the first five were amended and restated in number six. Everything in the first six were amended and restated in number seven and so forth. So we're up to, I think, 20 now. We keep going. It's like the ever ready battery. We keep going and it's now June of 2021. And it's a year and a half at least after this all began. And are we still repeating the earlier ones or are we? Yes, repeating the earlier ones. So we're not excluding them simply for the passage of time. We're not saying, okay, this is not an emergency anymore as to that particular area of law. We're saying it's all still an emergency, suffer. Right, exactly. That's wrong, isn't it? I think it's wrong. We want to reopen everything. Want to get back to normal. And yet the state doesn't see this as normal at all. They still see it as a burgeoning emergency legally. Yep. And they do that because emergency proclamations have a limited life. So I think it's 60 days. So on the 59th day, they come up with emergency proclamations saying, well, we're still in emergency. So here's what it is. We'll amend and restate everything that's come before for another 60 days. And you kind of daisy chain it down the path. So you're in a state of emergency for a year and a half or more. Well, it wasn't clear at the outset. I remember you and I talked about it back when about whether you could do that, whether you could daisy chain this way because the law says you get 60 days to do your thing with emergencies. And what the administration here has done is it has taken that and made it into not 60 days but a year and a half. I don't know if that's what the legislature intended but let me ask you this question. If we were going to reform this area, if we're gonna make this kind of thing impossible, would any particular legislative action be helpful or are you saying rather that we have to go individually the court on anything we feel that's overreaching? Well, you know, in this past legislature, there was I believe a bill that was aimed at reforming this daisy chain practice. It passed conference committee. It was all set to go up to the governor and then lo and behold, the house on the very last day switched its position and said, okay, we're gonna recommit this. So everything falls to the ground. And no transparency on that. Yeah, we don't know why that happened. Well, Tom, it's always a pleasure. I always, after our discussions, I always sort of need to soak my head a little but that's just me. And of course, I look forward to the next show and the next set of multiple complex compound revelations. Thank you, Tom Yamachika, president of the Tax Foundation of Hawaii. Thanks, T. Aloha.