A bill designed to help counties crack down on illegal vacation rentals — an increasingly divisive issue in neighborhoods across O'ahu — was stripped of a key provision by two state House committees yesterday.

Supporters of the measure, however, said the change in the bill was based on faulty testimony and hope that it can be corrected in conference committee later this session.

Members of the House tourism and taxation committees yesterday approved the bill, SB 750, which could lead to stricter tax law compliance by operators of vacation rentals and bed-and-breakfast establishments.

However, the final version of the bill did not include a provision that would have required state tax officials to share information about vacation rental operators with the counties, which are in charge of enforcing local zoning laws.

"That's disappointing," said Don Bremner, a spokesman for Keep it Kailua, a group opposed to illegal vacation rentals.

Officials estimate that more than 1,000 transient vacation rentals may be operating in neighborhoods throughout O'ahu, most of them illegally since the City Council banned new permits in 1989.

Even though they don't have permits, many vacation rental operators continue to pay the state's general excise and transient accommodation taxes to avoid running afoul of state law. Supporters of the measure had hoped the new bill would give county officials a new way to identify the illegal operations and lead to notices and fines that would shut some of them down.

After hearing more than two hours of sometimes passionate testimony from people on both sides of the issue, Tourism and Culture Committee Chairman Ryan Yamane, (D-37th, Wai-pahu, Mililani), recommended that the bill move forward without the provision authorizing the transfer of information from the state to the county.

The decision was based on testimony from a state Tax Department official who said the state is not allowed to share tax information with others, he said.

However, outside the committee room, Bremner, city officials and others said they believe state law does allow the sharing of tax information.

They pointed to a provision in the state tax code says the information can be made available to "persons duly authorized by the state in connection with their official duties" or "any duly accredited tax official of the United States, any state or territory, or of any county of this state."

"I think the committees made their decision based on faulty testimony," Bremner said.

Other opponents of the vacation rental industry testified that the inability to enforce county laws is creating deep rifts that pit neighbor against neighbor in many residential neighborhoods.

"One of the causes of inflated rents and home prices is the terrific influx of second-home buyers who do not live here but rent these homes as vacation rentals illegally," Kailua residents Richard and Francine Hagstrom said in written testimony. "This also has resulted in a proliferation of on-street parking, loud noises from partying vacationers and increased traffic in our previously quiet neighborhood.''

Supporters say the vacation rentals provide needed income to struggling families and aren't as disruptive as opponents make them out to be.

"It is invasion of privacy to share state tax information with the county. Making these taxpayers' identities available to the county would drive them further underground," said Kailua resident Vicki Landenberger.

Many others urged lawmakers to support a version of the bill that would encourage the counties to grant more permit operations and thus increase state tax revenues from legal operations.

In Honolulu, the City Council has recommended that the city study the possibility of allowing more vacation rentals, but rules to do that have been stalled in the city's Department of Permitting and Planning since 2005.

City Planning Director Henry Eng said in his written testimony that the city was eager to share its information with the state Tax Department but the flow of information should go both ways.

"Catching the vacationers at the site can often be very difficult as they generally do not spend much time at the site," Eng said. "As such the TAT (transient accommodation tax) information would be invaluable" in bringing citations against illegal operators.

The amended version of the bill now goes to the House Finance Committee. If approved by the full House, it would go to a conference committee with state senators, who earlier approved a version of the bill authorizing the state to give tax information to the counties.

Reach Mike Leidemann at mleidemann@honoluluadvertiser.com.