Insurance reforms have a tax elephant in the room

'If lawmakers are confused, heaven help the rest of us'

Insurance reforms have a tax elephant in the room


By Jen Frost

Stakeholders have high hopes that a bill backed by the insurance industry will bring calm to Hawaii’s ailing property insurance market – but critics say there is a tax-shaped elephant in the room.

Bill HB2686 sets out a range of measures to tackle the state’s condo insurance crisis, among them a tax hike on short term rentals (STRs) and conveyancing. Some of the additional funds raised would flow into its insurers of last resort, but the extent of this taxation remains anyone’s guess.

Just how much additional taxation is being sought has yet to be outlined. This, according to Tax Foundation of Hawaii president Tom Yamachika, is “very disquieting”.

“At the last hearing on this bill, which I participated in virtually, even the lawmakers considering the bill were a bit confused over how much is being asked for,” Yamachika told IBA. “If they're confused, heaven help the rest of us.”

Fears last resort insurance tax boost could backfire

If lawmakers get this wrong then this could cause big problems for the state, Yamachika cautioned. A too-high tax on STRs could “crater” Hawaii’s tourism market, he warned.

“We already have one of the highest transient accommodation tax rates in the country, and we do know that there are several competing destinations who would love to have our business,” Yamachika said. “I'm very wary of giving those other destinations an argument that, ‘hey, Hawaii is just too expensive, come here instead.’”

Yamachika was further concerned that upping conveyance tax too much could “wreak havoc” on the property market, even as the bill looks to fix issues faced by a dearth of wind insurance coverage required by federal mortgage lenders.

“We don't like signing blank checks – we are now kind of worried about what this bill would do if it's allowed to pass through the legislature and then have any numbers inserted in the last minute without any kind of public input whatsoever,” Yamachika said.

Hawaii’s accommodation taxes are already high

  • Hawaii’s state accommodation tax, or transient accommodation tax (TAT), is 10.25%.
  • Hawaii counties have an additional visitor accommodation tax of 3%
  •  The General Excise Tax (GET) rate in Hawaii is 4%

‘We’re the scapegoat’ – Hawaii unit owners face mounting pressure

​Jonathan*, not his real name, lives on the mainland and owns a unit in a Hawaii condo building. He spoke to IBA under the condition that he not be named, citing concerns about a current “hostile” environment around STR owners and tourism. His homeowners association’s (HOA’s) insurance premiums have skyrocketed by more than 500%. Now STRs are looking at another, as yet undefined, tax bump.

“I feel the government is creating an invisible enemy that doesn't exist,” Jonathan told IBA. “We're the scapegoat.”

STRs in Hawaii are already taxed at one of the highest rates in the country. Meanwhile, mainland owners have faced mounting pressure from Governor Josh Green to sell up or shift to a long-term rental model. But factoring in monthly HOA fees and mortgage costs, Jonathan was skeptical that his two-bedroom unit would be in budget for many long-term renters or buyers. Nor would it be suitable for families looking for in-demand three-bedroom properties, Jonathan said.

The property owner said he has been wary of a making a “knee jerk” reaction such as selling up, but the situation remains difficult with mounting pressure from many sides.

“It feels as if the cancel culture in Maui is very strong, because everyone knows each other,” Jonathan said. “You cannot speak up.”

The unit owner was insistent that he is not the bad guy in this situation. His property has been used to house wildfire victims. With both FEMA and the Red Cross program both having sought to house people displaced by the fires, this has at times created confusion.

“Red Cross said they needed short term rental owners, as they didn't have enough units, then the FEMA program comes along and says: ‘We need your unit’,” Jonathan said. “So, you’re telling me I need to kick out those Red Cross people out to qualify for your program? I've only got one place.”

When Red Cross people were moved on from properties into other housing, FEMA left some units “sitting empty”, Jonathan claimed.

A FEMA spokesperson told IBA that the organization’s overall objective has been to move Red Cross placed survivors into “longer term temporary solutions”.

“FEMA has been working to get disaster survivors out of Red Cross sheltering options, into FEMA interim housing solutions,” the spokesperson said. “People who have had their lives destroyed need long term temporary housing, in order to contemplate what their permanent housing solutions are going to be. “

Insurers of last resort bill has strong backing

HB2686 has garnered widespread support from multiple stakeholders in the state, including the Hawaii Insurers Council. The bill comes as some housing associations have seen condo insurance costs spike by as much as 1000%. Individuals have also struggled to get the cover they need, amid a capacity crunch.

Hurricane risk, rising reinsurance rates across the board, and ageing buildings may be to blame, but costs have spiked since wildfires ravaged parts of Maui last August. The insurance crisis is a state-wide problem that has added to housing shortage pressures on residents.

In addition to hiking taxes, the bill seeks to expand the remit of Hawaii’s insurers of last resort, the Hawaii Property Insurance Association (HPIA) and the Hawaii Hurricane Relief Fund (HHRF). It also looks to reactivate insurer assessments and special mortgage recording fees.

The legislation will be welcome if it can play its part in stabilizing the insurance market. First, lawmakers will have to address the tax question.

*’Jonathan’ spoke to IBA under condition of anonymity

Got a view on Hawaii’s plans to shore up its property insurance market? Leave a comment below.

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