The Hawaii Supreme Court last week invalidated a proposed constitutional amendment that would have allowed the legislature to impose a “surcharge” on the real property tax for investment properties with the proceeds available to go for education. The court’s decision was unanimous.
The amendment had been proposed and backed by the Hawaii State Teachers Association, but it was actively opposed by others, including not only business interests and developers, but the University of Hawaii Professional Association, the UH faculty union, which sent a series of mailers attacking the proposal over the past two weeks.
Unfortunately, the Supreme Court, under considerable time pressure, issued its opinion just one day after it heard oral arguments in the case. The timing did not allow for a careful opinion detailing how the court reached its conclusion.
Petitioners challenge the ballot question as unclear and misleading in violation of Hawaii Revised Statutes (HRS) § 11-118.5 (2011), which provides in relevant part, “The language and meaning of a constitutional amendment shall be clear and it shall be neither misleading nor deceptive.” The ballot question is as follows:
Shall the legislature be authorized to establish, as provided by law, a surcharge on investment real property to be used to support public education?
The proposed constitutional amendments to article VIII, section 3 and article X, section 1 of the Hawai‘i Constitution would provide that the exclusive authority of the counties over functions, powers and duties relating to the taxation of real property be amended to also authorize the state legislature to impose a “surcharge on investment real property” to support public education. The ballot question as written does not comply with the requirements of HRS § 11-118.5 that the language and meaning of the ballot question be clear and not misleading. Accordingly,
IT IS HEREBY ORDERED that the ballot question is declared invalid. (emphasis added)
Absent a fuller explanation from the court, it’s necessary to go back to the arguments made by the counties in support of their position.
Several arguments are laid out in the counties’ petition to the court asking for relief. Each of these arguments is laid out in detail.
The Ballot Question Should Be Invalidated Because It Is Unclear and Misleading
A. It is misleading to ask voters to authorize a tax without using the word “tax”
B. “Investment real property” is misleading because “investment” is not defined
C. It is misleading to tell voters the ballot measure is to “support public education” when the proposed constitutional amendment does not require the legislature to increase spending for public education
D. The phrase “as provided by law” misleads voters into thinking that current law already allows the state legislature to impose a real property tax when in fact it does not
Additional details were provided in the counties subsequent reply to the state’s attempt to answer the complaint.
Here, the counties argued that the term “surcharge” might be clear to lawyers who turned to a legal dictionary, but argued that was not the standard that would apply to an average voter, who would be very unlikely to consult a legal dictionary.
And what about the term “investment real property”? Supporters of the constitution amendment argued this and other definitions would come after the amendment went into effect and the legislature then turned to the task of writing the implementing legislation.
The counties responded:
The State presents no argument to support the clarity of “investment real property,” but instead suggests clarity because the phrase “as provided by law,” which precedes “investment real property,” may be cured by a legislative definition after the voters have approved the amendment. But the voter speaks first, and must choose between “Yes” and “No” without the benefit of such a definition (which the legislature may or may not provide).
And, further, the counties argued:
“To support public education” is misleading because the average voter could think that a Yes vote will increase school spending when there is no guarantee that educational funding will increase.
Additional legal arguments were made in an Amicus Curiae (or “friend of the court”) brief filed on behalf of a number of individuals and organizations.
I was surprised by this, as I don’t recall seeing this mentioned in news reporting on the case.
Those joining in the Amicus Curiae:
Tax Foundation of Hawii
Grassroot Institute of Hawaii
Retail Merchants of Hawaii
Waikiki Improvement Association
Aloha Petroleum
Castle & Cooke Homes Hawaii
Fergus & Company
Kilpatrick Enterprises, Inc.
Mulkern Landscaping & Nursery
Waltz Engineering
Bruce and Dede Heiman
Barbara Marumoto-Coons
Anson O. Rego
Willis Yap
Their brief drills down further into the argument that the wording of the ballot issue is misleading.
For example:
The effect of the constitutional amendment is to give the Hawaii Legislature power to levy real property tax, in an unspecified amount, on “investment real property,” whatever that is. This is a new power to tax. The people of Hawaii have for the last forty years vested the power to tax real property in the counties exclusively. Yet there is no mention whatsoever of tax in anything to appear on the ballot.
And they go on to cite legal precedents from other jurisdictions on the same issue.
An appendix to the Amicus brief includes a “statement of interest” on behalf of each of those individuals and groups that signed on to it. Check it out.
In any case, there’s a lot here to chew on for anyone interested in digging further.
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There is a definition, and this should have been argued. We don’t know from the ruling why it was poorly defined. Note to the argument that because the Countied were granted this in a prior constitution it can’t be amended. The state is going to have to do this at some point. Our income tax base here is incredibly narrow, worsened by this out of state investment. The owners pay no state taxes themselves. The GET is small, and largely avoided when they rent the property. The interesting thing is thewall of opposition was, the Real Estate industry, former governores, the mayors, the Tax Foundation. It was a lesson about the focus of conventional wisdom and support for the wealthy. That there was a discussion actually was a win of sorts. A significant number of people now see property taxes, and a rate rise as a good thing.
From Investopedia.
“Investment property is real estate property that has been purchased with the intention of earning a return on the investment, either through rental income, the future resale of the property or both.”
@Lawrence- I’m pretty sure that definition of investment property that you have posted opens everyone to being taxed. Excuse me, surcharged.
For years, while the Counties set the rates for real property taxes, the State/Territory made the assessment/”the assessed valuation” of all real property. Believe it was the 1978 con-con when this additional power passed to the Counties.
Lawrence, I think there could still be some argument based on the Investopedia definition you provided. How do you prove intent? If you lived in the house as your primary residence initially, would it still be considered an investment property if you subsequently decided to rent it out?
Even if the owners pay no state taxes, and there is only a small GET, the renters who are associated with the property are likely to pay state taxes, so is it really that different from an owner-occupant?
Of course, this argument depends on there actually being tenants, and the state loses out if the property is left empty or used only a couple weeks a year. To solve that, take a look at the Empty Homes tax pioneered in Vancouver, B.C. It was able to discourage the trend toward empty investment properties that had been driving up their housing prices and rents.
Interesting. I will definitely scrutinize future ballot questions on a different level.