SB100 HD1.DOC

SECTION 1. The legislature finds that, pursuant to Act 245, Session Laws of Hawaii 2016, beginning in 2019, the auditor is required to review certain credits, exclusions, and deductions under the income tax and financial institutions tax. Pursuant to Act 261, Session Laws of Hawaii 2016, beginning in 2018, the auditor is also required to review certain exemptions, exclusions, and credits under the general excise and use taxes, public service company tax, and insurance premium tax.

The legislature has chosen to relieve the auditor of this duty and assign the duty to the department of taxation. The legislature has also chosen to delay the review schedules of the reviews mandated by Act 261 by one year because relevant tax impact data may not be readily available in 2018. The department of taxation is undertaking a tax system modernization project that will be capable of efficiently collecting and reporting data on the tax expenditures from exemptions, exclusions, deductions, and credits. Thus, the legislature finds it prudent to delay the review schedules until after the tax system modernization project reaches a higher level of production.

The legislature has also chosen to provide the department of taxation with discretion in identifying and evaluating the purpose of the exemptions, exclusions, deductions, and credits to be reviewed and in identifying exemptions, exclusions, deductions, and credits that should not be reviewed.

The legislature also finds that the organic foods production tax credit should be added to the review schedule. The tax credit was established by Act 258, Session Laws of Hawaii 2016, and the schedule of income tax credit reviews was established by Act 245, Session Laws of Hawaii 2016. Because of the near simultaneous passage during the regular session of 2016 of the bills that became Acts 245 and 258, the organic foods production tax credit was not included in the review schedule of Act 245.

The purpose of this Act is to:

(1) Repeal Chapter 23, parts VI and VII, Hawaii Revised Statutes, requiring the auditor to review tax exemptions, exclusions, deductions, and credits;

(2) Require the department of taxation to conduct reviews of tax exemptions, exclusions, deductions, and credits;

(3) Clarify the review criteria regarding the achievement of the legislative purpose of the exemption, exclusion, deduction, or credit;

(4) Amend the list of exemptions, exclusions, deductions, and credits to be reviewed; and

(5) Add the organic foods production tax credit that was enacted by Act 258, Session Laws of Hawaii 2016, to the review schedule.

SECTION 2. Chapter 231, Hawaii Revised Statutes, is amended by adding a new part to be appropriately designated and to read as follows:

"PART . REVIEW OF TAX EXEMPTIONS, EXCLUSIONS, DEDUCTIONS, AND CREDITS.

§231-A Review of certain tax exemptions, tax credits, tax exclusions, and tax deductions. (a) The department shall review the tax exemptions, exclusions, deductions, and credits listed in this part.

(b) For each exemption, exclusion, deduction, and credit listed in this part, the department shall:

(1) Determine the amount of tax expenditure for the exemption, exclusion, deduction, or credit for each of the previous three calendar years;

(2) Estimate the amount of tax expenditure for the exemption, exclusion, deduction, or credit for the current calendar year and the next two calendar years;

(3) Determine whether the exemption, exclusion, deduction, or credit has achieved and continues to achieve the purpose for which it was enacted by the legislature as determined by the director of taxation;

(4) Determine whether the exemption, exclusion, deduction, or credit is necessary to promote or preserve tax equity or efficiency;

(5) If the exemption, exclusion, deduction, or credit was enacted because of its purported economic or employment benefit to the State:

(A) Determine whether a benefit has resulted, and if so, quantify to the extent possible the estimated benefit directly attributable to the exemption, exclusion, deduction, or credit; and

(B) Comment on whether the benefit, if any, outweighs the amount of the tax expenditure of the exemption, exclusion, deduction, or credit; and

(6) Report the amount of the tax expenditure of each exemption, exclusion, deduction, or credit per low-income resident of the State. For purposes of this paragraph, a "low-income resident of the State" means an individual who is a resident of the State and:

(A) Is the only member of a family of one and has an income of not more than eighty per cent of the area median income for a family of one; or

(B) Is part of a family with an income of not more than eighty per cent of the area median income for a family of the same size.

This ratio shall be estimated by dividing the annual tax expenditure for the exemption, exclusion, deduction, or credit by the number of low-income residents of the State in the calendar year. The estimate determined pursuant to this paragraph is intended to display the effect on low-income residents of the State if they directly receive, either through tax reduction or negative tax, the dollar amount of the tax expenditure saved by elimination of the exemption, exclusion, deduction, or credit.

(c) The director of taxation shall submit the findings of the reviews required under this part to the legislature and governor not later than twenty days prior to the convening of the regular session following the year the review is to be performed.

(d) Notwithstanding any other law to the contrary, the reports required under this part shall include aggregated data on the exemptions, exclusions, deductions, and credits reviewed. The director of taxation shall include such aggregated data in the reports required under this part without regard to the total number of taxpayers represented in any set of aggregated data.

(e) Where appropriate, the director of taxation may review an exemption, exclusion, deduction, or credit that is not listed in this part.

(f) Where appropriate, the director of taxation may determine that an exemption, exclusion, deduction, or credit listed in this part need not be reviewed.

(g) The director of taxation may require any taxpayer claiming any exemption, exclusion, deduction, or credit to annually submit information regarding the exemption, exclusion, deduction, or credit to the department on a form to be prescribed by the department. Any taxpayer failing to submit the required information shall be subject to a penalty of $ for each instance of noncompliance.

§231-B Review beginning in 2019. (a) The exemptions and exclusions under the general excise and use taxes listed in this subsection shall be reviewed in 2019 and every tenth year thereafter.

(1) Section 237-13(3)(B)--Gross income of contractors from subcontractors;

(2) Section 237-13(3)(C)--Reimbursements to federal cost-plus contractors;

(3) Section 237-24.3(11)--Amounts received from aircraft and aircraft engine rental or leasing;

(4) Section 237-24.9--Amounts received from aircraft servicing and maintenance and aircraft service and maintenance facility construction;

(5) Section 238-1, paragraph (6) of the definition of "use"--The value of aircraft leases or rental and acquired or imported aircrafts and aircraft engines; and

(6) Section 238-1, paragraph (8) of the definition of "use"--The value of material, parts, or tools for aircraft service and maintenance and aircraft service and maintenance facility construction.

(b) The credits under the income and financial institutions tax listed in this subsection shall be reviewed in 2019 and every fifth year thereafter.

(1) Sections 235-12.5 and 241-4.6-–Credit for renewable energy technology system installed and placed in service in the State. For the purpose of section 231-A(b)(5), this credit shall be deemed to have been enacted for an economic benefit; and

(2) Section 235-17--Credit for qualified production costs incurred for a qualified motion picture, digital media, or film production.

§231-C Review beginning in 2020. (a) The exemptions and exclusions under the general excise and use taxes listed in this subsection shall be reviewed in 2020 and every tenth year thereafter.

(1) Section 237-16.5–-Gross income of real property lessees from sublessees;

(2) Section 237-16.8--Value or gross income of nonprofit organizations from conventions, conferences, trade shows, and display spaces;

(3) Section 349-10--Proceeds earned from annual senior citizen's fairs;

(4) Section 237-23.5--Amounts received from common payments of related entities;

(5) Section 237-24(13)--Amounts received by blind, deaf, or totally disabled persons from their business;

(6) Section 237-24(14)--Amounts received by independent cane farmers who are sugarcane producers;

(7) Section 237-24(15)--Amounts received by foster parents;

(8) Section 237-24(16)--Reimbursements to cooperative housing corporations for operating and maintenance expenses;

(9) Section 237-24(17)--Amounts received by TRICARE managed care support contractors; and

(10) Section 237-24(18)--Amounts received by patient-centered community care program contractors.

(b) The credits, exclusions, and deductions under the income tax and financial institutions tax listed in this subsection shall be reviewed in 2020 and every fifth year thereafter.

(1) Section 235-7.3--Exclusion of royalties and other income derived from a patent, copyright, or trade secret of a qualified high technology business;

(2) Section 235-9.5--Exclusion for income and proceeds from stock options or stocks of a qualified high technology business or a holding company for a qualified high technology business;

(3) Sections 235-17.5 and 241-4.4--Credit for capital infrastructure costs;

(4) Sections 235-110.7 and 241-4.5--Credit for capital goods used by a trade or business;

(5) Section 235-110.91--Credit for research activity; and

(6) Section 241-3.5--Deduction for adjusted eligible net income of an international banking facility.

§231-D Review beginning in 2021. (a) The exemptions and exclusions under the general excise tax, public service company tax, and insurance premium tax listed in this subsection shall be reviewed in 2021 and every tenth year thereafter.

(1) Section 239-2, paragraph (5) of the definition of "gross income"--Gross income of home service providers of mobile telecommunications services;

(2) Section 239-2, exclusions under the definition of "gross income"--Dividends paid by one member to another member of an affiliated public service company group or gross income from the sale or transfer of materials and supplies, interest on loans, and provision of services among members of an affiliated public service company group;

(3) Section 237-3(b)--Gross receipts from the sale or transfer of materials and supplies, interest on loans, and provision of services among members of an affiliated public service company group;

(4) Section 239-5.5--Gross income of utilities from monthly surcharges;

(5) Section 239-5.6--Gross income of electric utility companies from cable surcharges;

(6) Section 239-6.5--Tax credit for lifeline telephone service subsidies;

(7) Section 237-13(6)(D)(i), (ii), (iii), and (iv)--Gross receipts of home service providers acting as service carriers;

(8) Section 269-l72--Green infrastructure charges received by electric utilities;

(9) Section 237-29.7--Gross income or gross proceeds received by insurance companies;

(10) Section 431:7-207--Tax credit to facilitate regulatory oversight;

(11) Section 432:1-403--Exemption for nonprofit medical indemnity or hospital service associations or societies specifically from the general excise tax, public service company tax, or insurance premium tax; and

(12) Section 432:2-503--Exemption for fraternal benefit societies specifically from the general excise tax, public service company tax, or insurance premium tax.

(b) The credit and exclusions under the income tax listed in this subsection shall be reviewed in 2021 and every fifth year thereafter.

(1) Section 235-4.5(a)--Exclusion of intangible income earned by a trust sited in this State;

(2) Section 235-4.5(b)--Exclusion of intangible income of a foreign corporation owned by a trust sited in this State;

(3) Section 235-4.5(c)--Credit to a resident beneficiary of a trust for income taxes paid by the trust to another state;

(4) Sections 235-55 and 235-129(a)--Credit for income taxes paid by a resident taxpayer to another jurisdiction;

(5) Section 235-71(c)--Credit for a regulated investment company shareholder for the capital gains tax paid by the company;

(6) Section 235-110.6--Credit for fuel taxes paid by a commercial fisher;

(7) Section 235-110.93--Credit for important agricultural land qualified agricultural cost;

(8) Section 235-129(b)--Credit to a shareholder of an S corporation for the shareholder's pro rata share of the tax credit earned by the S corporation in this State; and

(9) Section 209E-10--Credit for a qualified business in an enterprise zone; provided that the review of this credit pursuant to this part shall be limited in scope to income tax credits.

§231-E Review beginning in 2022. (a) The exemptions and exclusions under the general excise and use taxes listed in this subsection shall be reviewed in 2022 and every tenth year thereafter.

(1) Section 237-24.3(1)--Amounts received from loading, transporting, and unloading agricultural commodities shipped interisland;

(2) Section 237-24.3(3)(A)--Amounts received from cargo loading or unloading;

(3) Section 237-24.3(3)(B)--Amounts received from tugboat and towage services;

(4) Section 237-24.3(3)(C)--Amounts received from the transportation of pilots or government officials and other maritime-related services;

(5) Section 238-1, paragraph (7) of the definition of "use"--The value of oceangoing vehicles for transportation from one point to another in the State;

(6) Section 238-3(g)--The value of imported intoxicating liquor and cigarettes and tobacco products for sale to persons or common carriers in interstate commerce;

(7) Section 238-3(h)--The value of vessels constructed under section 189-25, relating to commercial fishing vessel loans, prior to July 1, 1969; and

(8) Section 237-28.1--Gross proceeds from shipbuilding and ship repair.

(b) The credit and exclusions under the income tax and financial institutions tax listed in this subsection shall be reviewed in 2022 and every fifth year thereafter.

(1) Section 235-5.5--Deduction for individual housing account deposit;

(2) Section 235-7(f)--Deduction of property loss due to a natural disaster;

(3) Section 235-16.5--Credit for cesspool upgrade, conversion, or connection;

(4) Section 235-19--Deduction for maintenance of an exceptional tree;

(5) Section 235-55.91--Credit for the employment of a vocational rehabilitation referral;

(6) Section 235-110.2--Credit for in-kind services contribution for public school repair and maintenance; and

(7) Sections 235-110.8 and 241-4.7--Credit for ownership of a qualified low-income housing building.

§231-F Review beginning in 2023. (a) The exemptions and exclusions under the general excise and use taxes listed in this subsection shall be reviewed in 2023 and every tenth year thereafter.

(1) Section 237-24.3(4)--Amounts received by employment benefit plans and amounts received by nonprofit organizations or offices for the administration of employee benefit plans;

(2) Section 237-24.3(5)--Amounts received from food coupons under the federal food stamp program or vouchers under the Special Supplemental Foods Program for Women, Infants and Children;

(3) Section 237-24.3(6)--Amounts received from the sale of prescription drugs or prosthetic devices;

(4) Section 237-24.3(8)--Amounts received as dues by unincorporated merchants associations for advertising or promotion;

(5) Section 237-24.3(9)--Amounts received by labor organizations from real property leases;

(6) Section 237-24.75(2)--Reimbursements to the Hawaii convention center operator from the Hawaii tourism authority;

(7) Section 237-24.75(3)--Reimbursements to professional employer organizations from client companies for employee wages and fringe benefits; and

(8) Section 209E-11--Amounts received by qualified businesses in enterprise zones.

(b) The credits under the income tax listed in this subsection shall be reviewed in 2023 and every fifth year thereafter.

(1) Section 235-15--Credit for purchase of child passenger restraint system;

(2) Section 235-55.6--Credit for employment-related expenses for household and dependent care services;

(3) Section 235-55.7--Credit for a low-income household renter;

(4) Section 235-55.85--Credit for food and excise tax; and

(5) Section 235-110.94--Credit for organic foods production.

§231-G Review beginning in 2024. The exemptions and exclusions under the general excise and use taxes listed in this section shall be reviewed in 2024 and every tenth year thereafter.

(1) Section 237-24.3(2)--Reimbursements to associations of owners of condominium property regimes or nonprofit homeowners or community associations for common expenses;

(2) Section 237-24.5--Amounts received by exchanges or exchange members;

(3) Section 237-25(a)(3)--Gross income received from tangible personal property sales to state-chartered credit unions;

(4) Section 237-24.8--Amounts received by financial institutions, trust companies, trust departments, or financial corporations acting as interbank brokers;

(5) Section 237-26--Gross proceeds of scientific contractors and subcontractors;

(6) Section 238-3(j)--The value of property or services exempted by section 237-26, relating to scientific contracts; and

(7) Section 237-27--Amounts received by petroleum product refiners from other refiners.

§231-H Review beginning in 2025. The exemptions and exclusions under the general excise and use taxes listed in this section shall be reviewed in 2025 and every tenth year thereafter.

(1) Section 237-24.7(1)--Amounts received by hotel operators and hotel suboperators for employee wages and fringe benefits;

(2) Section 237-24.7(2)--Amounts received by a county transportation system operator under a contract with the county;

(3) Section 237-24.7(4)--Amounts received by orchard property operators for employee wages and fringe benefits;

(4) Section 237-24.7(6)--Amounts received from insurers for damage or loss of inventory of businesses located in a natural disaster area;

(5) Section 237-24.7(7)--Amounts received by community organizations, school booster clubs, and nonprofit organizations for precinct and other election-related activities;

(6) Section 237-24.7(8)--Interest received by persons domiciled outside the State from trust companies acting as payment agents or trustees on behalf of issuers or payees of interest-bearing instruments or obligations;

(7) Section 237-24.7(9)--Amounts received by management companies from related entities engaged in interstate or foreign common carrier telecommunications services for employee wages and fringe benefits; and

(8) Section 237-24.7(10)--Amounts received from high technology research and development grants.

§231-I Review beginning in 2026. The exemptions, exclusions, or credits under the general excise and use taxes and insurance premium tax listed in this section shall be reviewed in 2026 and every tenth year thereafter.

(1) Section 237-27.5--Gross proceeds from air pollution. control facility construction, reconstruction, operation, use, maintenance, or furnishing;

(2) Section 238-3(k)--The value of air pollution control facilities;

(3) Section 237-27.6--Amounts received by solid waste processing, disposal, and electric generating facility operators under sale and leaseback transactions with political subdivisions that involve the facilities;

(4) Section 237-29--Gross income of qualified persons or firms or nonprofits or limited distribution mortgagors for certified or approved low-income housing projects;

(5) Section 238-3(j)--The value of property, services, or contracting exempted by section 237-29, relating to certified or approved housing projects;

(6) Section 431:7-208--Credit for low-income housing;

(7) Section 46-15.1(a)--Gross income from county low-income housing projects; and

(8) Section 346-369--Compensation received by provider agencies for homeless services or homeless facility management.

§231-J Review beginning in 2027. The exemptions or exclusions under the general excise and use taxes listed in this section shall be reviewed in 2027 and every tenth year thereafter.

(1) Section 237-29.5--Value or gross proceeds from tangible personal property shipped out of State;

(2) Section 237-29.53--Value or gross income from contracting or services performed for use outside the State;

(3) Section 238-1, paragraph (9) of the definition of "use"--The value of services or contracting imported for resale, consumption, or use outside the State; and

(4) Section 237-29.55--Gross proceeds or gross income from the sale of tangible personal property imported into the State for subsequent resale.

§231-K Review beginning in 2028. The exemptions or exclusions under the general excise tax listed in this section shall be reviewed in 2028 and every tenth year thereafter.

(1) Section 237-23(a)(3)--Fraternal benefit societies, orders, or associations for the payment of benefits to members;

(2) Section 237-23(a)(4)--Corporations, associations, trusts, or societies:

(A) Organized and operated exclusively for religious, charitable, scientific, or educational purposes;

(B) Operating senior citizens housing facilities qualifying for loans under the United States Housing Act of 1959, as amended;

(D) Operating or managing homeless facilities or other programs for the homeless;

(3) Section 237-23(a)(5)--Business leagues, chambers of commerce, boards of trade, civic leagues, agricultural and horticultural organizations, and organizations operated exclusively for the benefit of the community or promotion of social welfare, including legal service plans;

(4) Section 237-23(a)(6)--Hospitals, infirmaries, and sanitaria;

(5) Section 237-23(a)(7)--Tax-exempt potable water companies serving residential communities lacking access to public utility water services;

(6) Section 237-23(a)(8)--Agricultural cooperative associations incorporated under state or federal law;

(7) Section 237-23(a)(9)--Persons affected with Hansen's disease and kokuas with respect to business within the county of Kalawao;

(8) Section 237-23(a)(10)--Corporations, companies, associations, or trusts organized for cemeteries; and

(9) Section 237-23(a)(11)--Nonprofit shippers."

SECTION 3. Section 231-3.4, Hawaii Revised Statutes, is amended as follows:

1. By amending subsection (a) to read:

"(a) The department of taxation shall publish reports on the following:

(1) Hawaii income patterns – individuals;

(2) Hawaii income patterns – businesses;

(3) Tax credits; [~~and~~]

(4) General excise tax exemptions that:

(A) Are tax expenditures at the wholesale rate;

(B) Are tax expenditures at the retail rate; and

(C) May be foregone opportunities to export taxes; provided that the department of taxation shall have the discretion to determine the exemptions that fit within each of the categories within subparagraphs (A), (B), and (C) and those that do not fit into any of the categories. The department shall not be required to publish reports on exemptions that do not fit into any of the categories[.]; and

(5) Tax expenditures as described in part of this chapter."

2. By amending subsection (c) to read:

"(c) The department of taxation shall provide the reports required by subsection (a)(1) and (3) to the legislature no later than twenty days prior to the convening of each regular session; provided that on or before December 31, 2015, the department of taxation shall report to the legislature on the status of upgrading its forms and reporting capabilities per the implementation of the department of taxation's tax system modernization. The department of taxation shall provide the reports required by subsection (a)(2) and (4) to the legislature no later than twenty days prior to the convening of the 2017 regular session and each session thereafter. The department shall provide the reports required by subsection (a)(5) on the schedule provided in part of this chapter."

SECTION 4. Chapter 23, part VI, Hawaii Revised Statutes, is repealed.

SECTION 5. Chapter 23, part VII, Hawaii Revised Statutes, is repealed.

SECTION 6. In codifying the new sections added by section 2 of this Act, the revisor of statutes shall substitute appropriate section numbers for the letters used in designating the new sections in this Act.

SECTION 7. Statutory material to be repealed is bracketed and stricken. New statutory material is underscored.

SECTION 8. This Act shall take effect on July 1, 2030.

THE SENATE	S.B. NO.	100
TWENTY-NINTH LEGISLATURE, 2017		S.D. 2
STATE OF HAWAII		H.D. 1