Cronyism and Corporate Welfare, in Hawaii

I don't know if its the distance from the Mainland or something about its history, but Hawaii often appears to be among the worst states for regulatory capture by local businesses.  This example was brought to me by a co-worker, who lives in AZ but wants to buy a condo in Hawaii.  They want the condo for their own use, but also hope to rent it out.  This kind of model is more appealing nowadays given the ease (and low cost) with which one can advertise rentals on various Internet sites.

But not so fast, not in Hawaii.  In legislation that reminds be of stuff from the 1990's when businesses tried to fight Internet-driven disintermediation, Hawaii is proposing to force non-Hawaiians to use a local broker to list their rental properties.  Apparently local residents can still list their properties on low-cost Internet sites, but folks on the mainland (also known as "the United States") must use a high-cost locally licensed broker, who typically charge 50% of rental fees as a commission.  These type of commission rates are farcical - they imply that fully half the value of a one-week condominium stay is due to the broker, not the condo itself, its location, etc.  The only way brokers can charge these fees is by maintaining a tight cartel enforced by government licensing laws.

Any reasonable person will look at this law and immediately know it is about crony protection of local real estate brokers.  Of course, that is not what the law says.  It is all about "consumer protection"

The legislature also finds that requiring nonresident owners to employ a licensed professional such as a real estate broker or salesperson or a condominium hotel operator is an important consumer protection measure. Consumers who use real estate companies, real estate brokers, real estate salespersons, or condominium hotel operators for their transient accommodation rental needs can do so with the knowledge that all money generated will flow through a client trust account, the appropriate federal tax form 990s will be generated, and accurate transient accommodations taxes and general excise taxes will be paid. Real estate companies, real estate brokers, real estate salespersons, and condominium hotel operators must comply with specific licensing and bonding requirements, thus offering additional protections for consumers.

So consumer protection is defined as making sure taxes get paid and the government forms get filled out.  Because God knows my entire vacation would be ruined if Federal tax form 990 was not filled out properly.

This is total BS, and Milton Friedman called it years ago when he wrote on licensing:

The justification offered is always the same: to protect the consumer. However, the reason is demonstrated by observing who lobbies at the state legislature for the imposition or strengthening of licensure. The lobbyists are invariably representatives of the occupation in question rather than of the customers. True enough, plumbers presumably know better than anyone else what their customers need to be protected against. However, it is hard to regard altruistic concern for their customers as the primary motive behind their determined efforts to get legal power to decide who may be a plumber.

This is also a great example of voters agreeing to add costs on everyone but themselves.  If the almost inevitable Constitutional concerns with this law forced in-state and out-of-state condo owners to be treated equally, local owners would immediately push back, hard, against the costs this law would impose.  Only  by structuring this law to apply to those annoying out-of-staters could it ever be passed.

I have been considering taking advantage of low prices in Hawaii to buy a condo, but I may rethink that plan given this pending legislation.

  • obloodyhell

    Why is this even constitutional? Isn't it interfering in interstate commerce?

  • DrTorch

    Or, you could set up a low-cost rental brokerage and move to Hawaii!
    >obloodyhell- One might think so. But with years of sophisticated legal education, one learns that protecting various trades (such as the practice of law) is in the best interest of the government.

  • http://luispedro.org Luis Pedro Coelho

    You're wrong in your penultimate paragraph. Barriers to trade harm both sides. This hits Hawaiian voters too as it makes their property less valuable, leads to fewer visitors, &c

    It's diffuse costs concentrated gains.

  • SamWah

    Isn't there a "hotel" tax attached to such rentals?

  • Don

    I'm with Luis. Hold onto your money, and buy when the property prices inevitably crash because of all those evil main-landers dropping Hawaiian property for condos near Disney Land or brand-new condos on the Jersey Shore (subsidized with our tax dollars).

    As somebody who lives in a town where tourism is king (San Antonio), I gotta tell you, punishing your prospective customers is beyond stupid. It would be like Texas outlawing the drilling of oil wells, or California... well, NOTHING would surprise me there anymore :^).

  • sabre_springs_mark

    Right, but your points are less obvious to the typical Hawaiian voter, who shortsightedly looks at the 50% tax on out of staters and not the long term property value issues.

  • sabre_springs_mark

    States will try even if they know the law is unconstitutional. Good case, CA wouldn't let Oakies in in the dustbowl era. Supreme court said you can not create restrictions for American Citizens to immigrate to another state. Some 50 years later the state charges $500 bucks per vehicle for any vehicle purchased out of state -ostensibly for "clean air compliance issues" but it was charged whether the car met CA clean air standards or not. I was thinking as a Californian - doesn't his violate the dustbowl ruling?

    about 5 years later the courts finally said it did, and the state offered refunds for those who applied. I am sure they didn't refund a great percentage of what they collected.

  • datimmerman

    Bummer. I might not have visited Hawaii this year if it wasn't for the availability of a low cost rental I found via VRBO. Had this law been in effect earlier this year I probably would have just gone somewhere cheaper.

  • Mike Smith

    People dream of Hawaii as a romantic destination but when it comes to running a business there it's beyond any explanation. You may see how much irritation this legislation caused among mainland owners: http://blog.rentini.com/tag/sb2089/

    As a vacation rental owner of multiple Hawaiian properties for 8 years I haven't seen anything besides obstacles and rising taxes. The main goal of their government is to do everything slower and less for a bigger return. Speaking of killing the goose that laid the golden eggs!