 Hi everybody. I'm Mark Coleman, your host this week. This episode of Talking Tax, and I'm joined by my co-host, Tommy Amichika, President of the Tax Foundation of Hawaii. He's the man here really, the tax expert. I'm with the Grassroots Institute of Hawaii, Managing Editor and Coms Director for the Grassroot People. And we're gonna talk today about the school impact fees and whether we should keep them. There's some bills in the legislature, the 2024 legislature, that are proposing to repeal the school impact fee for various reasons. And Tom just wrote a column about that or he's got a column coming out about that in which he brings up a few really good points that I hope you'll read once it comes out. But one of them is that not only is the whole thing questionable constitutionally for various reasons, but even when they do collect the money, they seem to hoard it. Or maybe that was a previous column, Tom, but why don't you take it from there and we'll run with it. Okay, thanks Mark. We're talking this week about the school impact fees. If you don't know what they are, let me kind of give you some history. Our Department of Education is unique in several respects. Most states handle K-12 education at the local level. Like it could be a town, it could be a city, it could be a county, it could be a school district in many states. But we're different because we're descended from royalty. King Kamehameha III and we did have a king back in the old days, established the precursor to the Department of Education in 1840 to run education statewide throughout the kingdom, as it then was. Now with Hawaii being a state of the United States, a lot of the government that kind of grew up under the monarchy kind of stayed with us. And with that, the Department of Education that was supposed to provide for the education of children statewide. Along with that, and unlike most other states, the DOE doesn't rely on the property tax to fund education. Our constitution in the state of Hawaii now says that the property tax exclusively goes to the counties. So the schools are left with funding from the other taxes our government imposes primarily the general excise tax, which brings in half of our general fund revenue or close to it. And it's been that way since the 1930s at least, which is when the when the GET came into being. But then that wasn't enough. The DOE was given the power in 2007 to impose a tax. Now this is unique because no agency, even the Department of Taxation has the power to impose a tax. The Department of Taxation only executes the tax laws that are enacted by the legislature. And this point is actually what the title of your column was or will be a guess which agency can impose a state tax. And that was a really interesting concept that the DOE can do this. So the way it works is that developers of housing projects are required to provide land for school facilities depending on the number of kids that the products are expected to house. And the amount of capacity or lack thereof in the schools that now serve those areas that are being developed. Builders in the same districts that are too small to be expected to provide land have to kick in some cash instead. And in addition... So it's cash or land depending on the situation. Right. And in addition to that, all home builders or buyers must pay a construction cost fee. Right. So these sources of income go to the DOE. Well, can I back up for a second there, Tom? In looking at the 2015 state or 2019 state audit of the school impact fees and reading about the background, apparently this kind of started after the State Land Use Commission divvied up all the properties in the state back in the 60s, in other words, to rural agriculture, conservation, and urban. And somehow the DOE, I'm not sure how that related to the LUC, but the Land Use Commission, but somehow they had this what they called fair sharing. Fair share contributions, yes. Yeah, the fair share contributions. And that's what I'm unclear about how that started. None of it really sounds like it was a law. It just sounded like the DOE started sort of informally negotiating with developers to pony up some land or some cash to help build the future schools of their neighborhoods or whatever. And that was formalized in the 80s. And then finally in the 2007, like you said, they passed that law that turned it into school impact fees. So how do you think that the DOE was able to do this informally before that act came along that formalized it? Well, they must have had some kind of statutory authorization. I mean, I can't imagine that they wouldn't have anything. Otherwise, why would developers even talk to them, right? Yeah, I know it's not clear. I'm clear about that, but the reality is now we do have a law where the DOE is able to, you know, impose on these guys for money. And it hasn't all quite worked out as well as we might have hoped for various reasons. But anyway, so let's get into some of those. You mentioned and I think we need to go into next. There was an audit done of the school impact fee program by the state auditor who is actually supposed to do such things. He did one in 2019. And the audit report found that the school impact fees have been of questionable impact. He found that of the fair share contributions, a million here, a million there was spent to upgrade facilities, provide a couple more buildings in elementary schools in the various areas. But once the school impact fee was formalized, zero money was spent, zero, big fat zero there. And we're going what? It's all like, why are they collecting the money if they're not spending it, right? That's right. They're just wasting capital that could be out there and, you know, in the community. And at that time, the amount of impact fees collected, this is 2019 now, was $5.3 million. Let's take a look at this graph to show what's been happening over the past few years. Okay. What the graph shows is it's up to 2024, a fiscal year 2024. And the balance of the school impact fees has swelled to $18 million from that 5.3. But what is even more interesting is that, you know, if you had money being spent out of one or more of these school impact fee accounts, you would expect the amount to go down, right? But the amounts keep going up and up and up. It's either flat or inclined up to the right, right? There are no dips. This is all money that's sitting in an account at the DOE. It's all sitting in the account of the DOE. Right now, there are four school impact fee districts. Okay. There's the newest one is Kalahita, which is along the Path of Skyline Rail. Yes. Which is on the bottom. Those are the bottom two bands. Then there's Leeward, which is the other one on a walkway. That's the gray and the yellow. Central Maui is the blue and the green, which is the next one up. And the top two are West Maui. It's kind of like, you know, small and in comparison, but still adds to the bigger pot. And the bigger pot is $18 million. And it doesn't seem to have been used. So that's why we have, you know, an issue and you hit it on the hair there. Mark, you said, well, if they're collecting all this money, why the hell aren't they using it? What's it there for? Yeah. Well, I guess it's there to raise the cost of developing houses, which gets passed on to the consumer. And it's another reason home prices in Hawaii are so high. That's really one of the major complaints right now, isn't it? Oh, yeah. Very much, very much so. If you want to build a housing development, you got to go through all this, all this red tape, permitting through various incendiary agencies, then you build the thing. And there are, you know, non-government delays and expenses, especially recently with the supply chain delays that we've had. And in the meantime, the Department of Education can't spend all the money that they're given. We've had recently an episode in the news where the DOE had to come to the legislature and said, look, we're going to lapse half a billion dollars worth of projects. Yeah. Yeah. Because they can't get to them. It's unreal. Yeah. So, of course, the legislators who worked really hard and fought tooth and nail to get those projects on the books, they were beside themselves, right? They worked this hard and everything is lapsed. I kind of thought, you know, I kind of half-tokenly at the time said, you know, maybe they hate me. And they hate me because both my elementary school, my intermediate school, and my high school, were all in the lapse list. All of them. Every school out of the three that I went to, they're all in the lapse list. Well, it seems like this discussion about the school impact fees, you know, you can't but help talk about the DOE at the same time usually. And so, on one hand, we can talk about how there might be, you know, a constitutional issue regarding the nexus between the fee and whether it really is appropriate, you know, for the person who's supposed to pay it. And all of those kinds of things and the hoarding of the money and the adding to the housing prices. But really, you know, it's also about the DOE and how it's got $2 billion, you know, and every year is their budget. And of course, as you said, this is like maybe 5%. Was that what you said? 5% of their budget is from school impact fees. Oh, probably much less than that. Yeah, yeah, yeah. So does it really even matter to them with so many millions of dollars, billions, do they really even need this anymore? Especially now too, when enrollment is declining, it's been declining steadily for, I got the chart around here somewhere, but definitely in the last 10 years it's been going down. I think the peak was in the 1980s or somewhere in the 90s. Well, let me tell you an interesting fact that came out in the auditor's report. You know how important the school impact fees are to the DOE? You know how many people they assign to it? One. One. Just one. Now, so apparently they don't care about this that much. And yet they're making a big deal about, for example, that affordable housing development in downtown Honolulu, they wanted to, I think under the emergency order, they wanted to, that was the first decision of the working group that got set up under the governor's emergency housing order. They exempted this adaptive reuse project downtown, which is about 50 units turning an old office building into condos. They exempted it from the school impact fee, which saved the developers and hence the ultimate buyers, at least $200,000 plus, which, you know, that makes affordable homes a little less affordable when you have to fork over money. There was also a story about somebody in very recently, 2022, there's a, I think it's Howard Hughes in Kakaako. They're actually, most of the developers incorporate the school impact fee that they have to pay into the price of the home. But Howard Hughes was packing it on like, here's what you're paying for this, here's the price of the home and here's what your school impact fee is, which was about $3,000 something, which per unit. And so people are going, what, what is this all about? And I wonder too with, like I said, with school enrollment going down and the birth rate declining and people leaving the state, is the school impact fee even make any, does it make a difference anymore? And even two, it also applies to people who don't even have kids and may never have kids. So there's a little bit of an unfairness there, I think. Thoughts on that? Well, it seems like there's a, people have a mentality to power grab for the DOE. I mean, even, we've been following a constitutional amendment bill that was proposed in 2018 first and it's come back to us again. But somebody, some genius has proposed, as an additional funding source for the DOE, to take back some of the property tax authorities from the counties to levy a surcharge, whatever that means, on residential investment property that's worth $3 million or more. Now, they don't even say real property. They say residential investment property. What does that mean? What does that mean? I mean, could it be, you know, if you had like $3 million in Hilton stock, would that count? Yeah, that's a really good question. I hadn't thought about that nuance. Or if you had some mobile homes. Yeah. Would that count? Uh-huh. You want to surcharge those? One thing that you always got to worry about when you're enacting, you know, broad language to give the state taxing power is when you let the genie out, you don't know what the genie is going to do. Yeah, it's a foot in the door. And the more the more wiggle room, you know, you leave in that lamp, the more trouble might come out of that bottle. Oh man, that whole thing, that, you know, the last one in 2018 went down because of the constitution, of the lawsuit that claimed the language was vague. But if the new bill really says residential investments, I think most people are thinking about, you know, rich people from the mainland buying an expensive house so that they won't live in half a year or whatever. That's what they think people are thinking about. That's what they think, right. But that language is so vague and malleable, you know? Yeah, it doesn't say tax, although that's what it is. It says surcharge. Uh-huh. It says residential investment property, whatever the heck that means. Yeah, wow. And there's some issues there. And like you said, the county's got, you know, super bend out of shape because one of the things that counties do is they go on the bond market, they borrow money, okay? And their primary revenue source for repayment of those bonds is the property tax. Mm-hmm. And the bondholders are uncomfortable at the prospect of having the property tax monkey with. Mm-hmm. And they've told the counties that in no uncertain terms. So the counties are opposing the constitutional amendment, you know, even today. And if the thing passes, you know, they're going to file suit again to get it off the ballot. And I think, you know, with the current state of the measure, it's not that different from the one that the Supreme Court shot down in 2018. Yeah, sounds like it. Yeah, I didn't. I hadn't thought about that as far as the language issue goes. I, you know, at the Grassroot Institute, we're just opposed to it simply because it's a tax hike. And all the problems that that can cause in the real estate market because this applies to conveyance tax. Was it the conveyance tax? Or is that a different one? That's a different one. Yeah. Having a rigged moment? Yeah. No, I think there's another lot that, yeah, it's like, they're grabbing everywhere, right? So I'm trying to make sure here, but. Yeah, those are different bills. Like it doesn't have enough money already. You know, that's what really blows me away. Yeah. And then they said, this is like totally necessary for teachers and so forth. And then, you know, I sympathize with them a little bit. You know, they aren't getting, you know, paid very much when you compare the cost of living here with that on the mainland. But that's a problem you solve by appropriation. By allocating the funds in our, you know, the monies in our general fund through the legislative process. And that's what we elect our lawmakers to do. They're supposed to, you know, go into the square building and oversee the expenditure of funds off of our general fund. And they make, you know, over a billion dollars in appropriations to DOE every year. Well, Tom, let me ask you in principle. Is your objection to the school impact fee that they're not spending it or that it's raising the cost of housing for people? Or is it just that you just don't like it at all? Well, I think my major concern about it is that they're not using it. And if they're not using it, why are they taking it from us? What have you heard from them about that? What do they ever say? Has anybody ever asked them how come you're just sitting on this money? I don't think anybody's given them an answer. They didn't give Les Condo an answer. When he wrote the report in 2019. I don't see any, or I haven't yet seen any testimony about, you know, what the DOE uses the school impact fee for these days. Would the DOE be officially endorsing this? I mean, would they be submitting testimony supporting this? Well, if you're talking about the bill to repeal the school impact fee, I would imagine they would be submitting testimony opposing it. Right. Right. Well, I think what I actually what I was talking about, that's a good point. Of course, they would oppose that. But the one about where they want to tack on the surcharge, they would probably... They're supporting it. They're supporting it. They're supporting it. HST is supporting it. You know, they don't care. They just want more money. Yeah. Well, that's interesting. I know that, you know, as going back to the school impact fee, the DOE would be opposed to that, too. I wonder if they've submitted any testimony. I'm sorry. I don't know at the moment. Yeah, I don't. I think one of those bills is coming up for hearing soon, but hasn't happened yet. So we may find out. But certainly from the looks of the graph, it doesn't look like they've been spending anything. Would it make you happier then if they started spending that money? Or do you... Yeah. I mean, they're supposed to be spending that money for the good of the people. Is this a pretty much... Is this like a special fund? This is like a special fund. Yeah, I believe it is a special fund. And there's, like you said, there's hundreds of these special funds just sitting there. Thousands. Thousands. I know you said that really. It's really thousands, huh? I think it's... I said that on a prior show and I went thousands. It's more than 2,000. I know they counted it at one point. My God. That's ridiculous. Isn't it? Yes. And it just so, you know, and at a time when people are constantly asking for more money at the legislature, wanting to raise our taxes, they're not even spending the money we're giving them or that they're taking, I should say. And going back to the school impact fee, it doesn't seem to be a practical enterprise anyway. It doesn't seem to really be a good idea to me considering all the demographics and the extra cost on houses. Well, I think they ought to focus more on maintaining the assets that they have, spending the money that we give them. As opposed to letting it rot and letting it lapse. Right. That's my two cents worth for today. Well, I look forward to future articles by you about the school impact fees. It's a kind of a cool topic. Maybe we won't have to be writing about this after this legislative session. Depending on what the legislature does with the bill to repeal, which we did at the Aggression Institute, we're going to have to submit testimony favoring the bill to repeal the school impact fee. So Tom, thank you very much. It's been a really fun show talking to you about something that probably most people don't really know about until they see that bill, maybe when they're buying their new home. They didn't know what it is. Yeah. And it was funny that you pointed out that the new district actually the train, the Honolulu Rail, as if that's going to be the new booms town for kids and new school demand, probably, huh? But anyway, thank you very much, everybody. We'll see you next time. And viewers out there in Allah Land, thank you very much for being here with us today. We hope you'll be back next week. If you liked this program, be sure to check like on your YouTube channel there and subscribe to Think Tech Hawaii. I'm Mark Coleman and this is Tom Yamachika, my host, our host. Wishing you a great day and a great week. Aloha.