Lawmakers yesterday approved levying more taxes on purchasers of high-value Hawai'i real estate as a way to help balance the state budget and avoid severe cuts previously intended in affordable housing and land conservation funds.

The Legislature passed House Bill 1741, which dramatically increases conveyance tax rates on property sold for more than $2 million, including homes, undeveloped land and commercial real estate.

If signed by Gov. Linda Lingle, the measure will raise conveyance tax rates for a second time in five years.

Currently, purchasers pay 30 cents per $100 of a property's sale price of $1 million or more, which adds up to $3,000 on a $1 million sale.

Under the bill, four new rate tiers, from 50 cents to $1 per $100 of the sale price, will be imposed on transactions of $2 million or more. That would increase the tax on a $2 million sale by 67 percent, from $6,000 to $10,000, and more than triple the tax on a $10 million sale, from $30,000 to $100,000.

Higher tax rates — from 60 cents to $1.25 per $100 of the sale price — would apply to purchases of single-family homes and condominiums of at least $2 million if the buyer doesn't live in the home.

Rates on property sold for less than $2 million would not change for owner-occupants.

Bills that raise taxes only on the more affluent or on businesses have often drawn criticism as unfairly distributing the tax burden.

Prior to 2005, Hawai'i had one conveyance tax rate for all property — 10 cents per $100 of the sale price. That year, the Legislature increased rates despite some criticism. Two more rates added in 2005 were 20 cents per $100 on property sold for between $600,000 and $1 million, and 30 cents per $100 for sales of $1 million or more. Properties not bought by owner-occupants were charged an additional 5 cents per $100.

At the time, the Tax Foundation of Hawai'i said a conveyance tax increase "perpetuates the concept that Hawai'i is a tax hell."

SWITCH IN PLANS

Yesterday, the Senate passed HB 1741 by a vote of 17-7. The House vote was 44-6, with one excused.

Increased conveyance tax rates were sought to boost the state general fund amid a budget crunch and fewer real estate transactions, which have shrunk conveyance tax proceeds in recent years.

Initially, HB 1741 proposed to boost state general fund revenue without raising tax rates by shifting more conveyance tax proceeds to the general fund and away from three special funds that help protect the environment and finance affordable housing development.

But opposition from state agencies managing the special funds and an outcry from affordable housing advocates and numerous environmental groups led the Senate Ways and Means Committee to lessen the proposed special fund cuts and instead raise conveyance tax rates.

SPECIAL FUNDS

Under the bill, the general fund would get 45 percent of conveyance tax proceeds, with the balance going to three special funds — 10 percent to the Legacy Lands Conservation Program, 25 percent to the Rental Housing Trust Fund and 20 percent to the Natural Area Reserve Fund.

Currently, the general fund gets 35 percent, the Legacy Lands fund 10 percent, the rental housing fund 30 percent and natural area fund 25 percent. These amounts will be restored after June 30, 2012, under the bill. But the higher conveyance tax rates don't get rolled back.

The special funds had faced big cuts under early versions of the bill that called for giving the general fund 75 percent of conveyance taxes by temporarily eliminating money for Legacy Lands, and cutting the rental housing fund to 15 percent and the natural area fund to 10 percent.

Supporters of the special funds said the losses would be magnified because all the funds are matched by federal or private contributions.

The Sierra Club's Hawai'i Chapter called the big special fund cuts a "tremendous step backwards" in protecting natural areas, and said the bill would undo what Democratic leaders hailed as landmark legislation in 2005, when the Legacy Lands fund was created and contributions were increased for the other two special funds.

KAHEA, an alliance of Hawaiian environmental activists, in written testimony opposing special fund cuts said: "These special funds provide far greater, long-term benefits to the people of Hawai'i than the short-term gain to the general fund."

AGENCIES' PLEAS

The Department of Land and Natural Resources in testimony said the big cuts would severely affect land protection programs that already face a 50 percent reduction in revenue because of the slowdown in property sales.

DLNR said the natural area fund is projected to get $2.4 million from 10 percent of the conveyance tax in the next fiscal year, down from $6 million at the present 25 percent.

The Hawai'i Housing Finance & Development Corp., a state agency overseeing the rental housing fund, testified that cutting the fund's tax share to 15 percent from 30 percent would halve fund revenue to $3.4 million in the next fiscal year and reduce matching funds that typically help produce 150 affordable rental units annually.