A Proposed Constitutional Amendment Would Let Hawaii Use Property Taxes To Fund Schools

The Legislature passed a similar bill in 2018, but the state Supreme Court invalidated the ballot measure for using vague and unclear language.

The Legislature passed a similar bill in 2018, but the state Supreme Court invalidated the ballot measure for using vague and unclear language.

Voters may get a chance to decide if the state should be allowed to use property taxes for public schools, a move that supporters say would get some of Hawaii’s richest homeowners to better support a historically underfunded education system.

The Legislature is considering a proposed constitutional amendment on the issue. But opponents argue that the amendment’s language is misleading for voters and could discourage real estate investment in Hawaii, pointing to failed attempts to pass a similar measure in 2018.

House Bill 1537 proposes a constitutional amendment that would empower the state to place a surcharge on residential investment properties valued at $3 million or more. Primary residences, as well as affordable housing, would be exempt from the tax.

Amy Perruso questions Hawaii Realtors director of advocacy Lyndsey Garcia about their opposition to HB 1537 on Tuesday, Jan. 30, 2024, in Honolulu. HB 1537 proposes amendments to articles VII and X of the Constitution to authorize legislation to establish a tax of residential investment property to increase funding for public education. (Kevin Fujii/Civil Beat/2024)" width="1024" height="683" />

In effect, the tax would target second properties under wealthy homeowners, many of whom live out-of-state, said Rep. Amy Perruso, who introduced the bill. The resulting revenue would fund all levels of public education, from prekindergarten to higher education, she added.

Under the state’s current constitution, only counties have the power to impose property taxes. Public schools receive much of their funding through the state’s general funds.

The Legislature passed a similar bill in 2018. But before the public could vote on the amendment, the Hawaii Supreme Court invalidated the ballot measure for using vague and unclear language.

Proponents of the new bill are hopeful it will make it all the way to the ballot this year.

Unlike the 2018 proposal, the new amendment specifies that the tax would only apply to properties valued at $3 million or more and includes an exemption for primary residences, supporters said Tuesday during a hearing before the House Education Committee.

Osa Tui Jr., president of the Hawaii State Teachers Association, said he’s optimistic that the specificity and clarity of the new language would help the proposed amendment avoid the same legal challenges it faced in 2018.

Tom Yamachika, president of the Tax Foundation of Hawaii, disagreed, saying the current ballot language is “almost the same” as it was in 2018. Voters may still fail to understand that some residential properties could face a tax increase if the amendment passes, he said.

It’s also unclear how much the tax would amount to or how often it would be levied, Yamachika said.

“The way it’s phrased now, there are basically no parameters and no limits on it,” he added.

He also said imposing an additional tax on homeowners’ properties could discourage real estate investment in Hawaii.

“People who have significant amounts of money and who can invest in second homes have enough money to know when to pull out,” Yamachika said.

If voters approved the constitutional amendment in November, it would be up to next year’s Legislature to decide the specifics of the property tax, Perruso said. The Legislature would also need to decide how to distribute the resulting tax revenue to different sectors of public education.

“It is really important that we specify in the enabling language that the monies be used to supplement and not supplant (existing) funding,” Perruso said.

The House Education Committee on Tuesday recommended that the bill be passed with amendments.

While HB 1537 has a good chance of making it through the Legislature, it will likely face significant opposition from real estate groups and Hawaii’s five counties, said Colin Moore, a political scientist at the University of Hawaii Manoa.

In Tuesday’s hearing, Lyndsey Garcia, director of advocacy for the Hawaii Association of Realtors, said the proposed tax could increase the costs of housing in the state, particularly for multifamily units and apartments. The taxes imposed on landlords could then be passed on to renters, she added.

Michael Formby, managing director of the City and County of Honolulu, also challenged the bill in written testimony, arguing that the proposed language for the ballot question remained “unclear and misleading.”

If the bill passes through the Legislature, the counties will likely try to bring the proposed amendment in front of the Hawaii Supreme Court once again, Moore said.

“The counties jealously guard their ability to levy property taxes,” Moore said. “It’s their major source of revenue.”

If the measure makes it onto the ballot, public opinion could be in the amendment’s favor, said Devin Thomas, a senior policy analyst at Hawaii Appleseed.

“There does seem to be an increasing appetite across the state for assessing higher taxes on non-residents to compensate for years, decades of nonresidents coming in and being able to occupy the housing market,” Thomas said.

Powerful interests, like HSTA and the real estate industry, are invested in the amendment’s outcome and will likely shape public opinion around the ballot measure closer to November, Moore said.

“How voters interpret it, either as an additional tax or as necessary money to support education, will really decide its fate,” Moore said.

Civil Beat’s education reporting is supported by a grant from Chamberlin Family Philanthropy.