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Testimony on Bill 9: ‘Empty homes’ tax won’t fulfill intention

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration March 1, 2022, by the Honolulu Council Committee on Budget.
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To: Honolulu County Council Committee on Budget
      Calvin K.Y. Say, Chair
      Radiant Cordero, Vice Chair

From: Grassroot Institute of Hawaii
           Joe Kent, Executive Vice President

RE: Bill 9 (2022) — RELATING TO REAL PROPERTY TAXATION

Dear Committee Members,

The Grassroot Institute of Hawaii appreciates the opportunity to submit testimony on Bill 9, which would implement a vacancy or “empty homes” tax on all Oahu homes ruled to be vacant for at least six months.

This measure has the admirable aim of opening up additional housing for Hawaii residents. To achieve this end, it would impose a 3% property tax surcharge on such vacant homes. Occupied houses would continue to face a 0.35% tax rate.

To put this in context, the property tax on a vacant house valued at $600,000 would be $18,000, compared with $2,100 currently.

The point of this bill is to incentivize the sale of empty houses in order to increase Oahu’s housing supply. But more likely it will have the effect of penalizing homeowners, driving up already sky-high taxes, implementing privacy-invasive and severe enforcement measures, and providing little to benefit to Oahu residents in need of affordable housing.

Here are some points to consider:

>> “Empty homes” taxes do not free up affordable housing.

The bill states that its goal is to encourage existing owners “to rent or sell vacant housing stock for use as homes for local residents.” However, the homes this bill targets — those owned by wealthy mainland individuals — are often not the homes that average Oahu residents can afford anyway.

Kam Napier, editor-in-chief of Pacific Business News, addressed this point when a similar measure was proposed in 2019. He wrote that “all it would do is put some luxury Kakaako apartments into the rental pool, renting for $5,000, $6,000 or even $8,000 a month. I don’t think that satisfies anyone’s desire for more affordable housing.”1

Thomas Davidoff, a real estate finance professor at the University of British Columbia, wrote in 2018: “Foreign-buying, and especially empty-home owning, is concentrated at the high end.”2

>> ‘Empty homes” taxes have been tried before with several unintended consequences.

Vancouver, Canada, imposed an empty-house tax in 2017 with little success.

In 2018, Canada’s CBC News reported that “in its first year of implementation, the tax appears to be doing little to achieve its stated goal.”3

In 2021, the Vancouver Sun noted that the tax’s effect on rental availability was hard to determine amidst other taxes, housing regulation and broader economic changes.4

And just last month, in February, 2022, Quartz reporter Camille Squires wrote, “Even where successful, vacancy taxes haven’t been enough to meaningfully bring down prices across a city. To meet demand, cities need more new construction.”5

>> Hawaii’s property tax is high enough already. 

Bill 9 claims that Hawaii has among the lowest property tax rates in the nation, but this, while true, is misleading. Why? Because, as the bill itself notes, the median cost for a single-family home on Oahu exceeds $1,000,000, as of August 2021, leaving Hawaii homeowners paying property taxes of $3,333 in actual dollars, which is on par with the national average of $3,719.6

As stated by housing information site Bungalow, “Hawaii has the lowest effective property tax rate in the country, but it does cost to live in paradise. It is one of the most expensive states to live in and has the highest median home value, which means that the actual dollar amount homeowners spend is on the high side.”7

>> Vacancy taxes require an invasive enforcement mechanism.

Bill 9 states: “The city may conduct audits and investigations to determine the validity of property status declarations made for any residential property.”

This means that to determine whether a house has been vacant six or more months in a year, the city would need to set up some sort of monitoring system. Not only would this add to the workload of existing city employees, or require additional employees to be hired, it also would authorize the city to demand from the homeowners “proof of principal place of residence of the owner, tenant or other occupant,” including:

>> Vehicle registration, government-issued personal identification, driver’s license; utilities records and mailing address used for personal bank and credit accounts.

>> Tenancy agreements, occupancy agreements, and proof of income and general excise taxes paid for rental income.

>>  Proof of receiving or providing medical care by the owner or tenant that precluded occupancy of the property.

>>  Proof of sale or transfer of ownership; sale activity efforts and listing in the multiple listing service for the property.

>> Death certificates.

>> Court orders and proceedings.

>> Proof of military orders of deployment.

>> Building permits and applications.

How invasive this scheme would be would depend on its implementation, but there is little doubt that this process would create headaches, and privacy worries, for homeowners.

Violation of the rules would involve steep fines — $25,000 a day for each offense — and even possible foreclosure.

>> All revenues would go to the city’s affordable housing dedicated fund, with 5% skimmed for “administrative costs.”

Bill 9 states: “Revenues from the tax collected under this article will be dedicated to the city’s affordable housing fund and other city affordable housing initiatives.” Further, “up to 5%” of the tax proceeds would be dedicated to “administrative costs.”

However, without changes to the state or city zoning regulations, which are the primary constraints on housing supply statewide and on Oahu, the city will only perpetuate a cycle of spending too much on housing development that makes little difference to the affordable housing shortage.

In addition, there is no evidence in the bill that diverting “up to 5%” of all revenues for alleged administrative costs would be justified. At the very least, evidence should be presented to justify any amount that would be skimmed.

>> The bill is unclear about how many houses it would cover. 

In Section 8, Bill 9 lists almost a dozen exemptions from the proposed “empty house” tax.

For example, houses belonging to deployed members of the armed forces, medical caregivers and those receiving medical care would not have to pay the 3% rate.

There are also exemptions for houses in probate court, those undergoing repairs or demolition, and those up for sale.

All of these exemptions are commendable, but they beg the question: How many houses do not qualify for an exemption? Without this figure, the city would be shooting in the dark.

>> Bill 9 acknowledges the underlying causes of Hawaii’s housing shortage, but does nothing to address them.

If there ever was a bill that attempts to address the symptoms of a problem instead of the causes, Bill 9 is it. In proposing an “empty house” tax for Oahu, the bill ironically states:

“An empty homes tax can help convert existing investment properties into housing for local residents without the need for costly construction, long delays for development and permitting, and taking more land for development.”

In other words, why should the city raise taxes on homeowners and threaten them with severe fines and invasions of privacy when it could simply direct its efforts toward removing the obstacles that are, as the bill admits, the root cause of the housing shortage: “costly construction, long delays for development and permitting, and [not making available] more land for development”?

As you might already know, the Grassroot Institute of Hawaii has issued several publications analyzing how zoning and other regulations throttle the growth of housing on Oahu and throughout Hawaii.

One was our policy report “Reform the Hawaii LUC to encourage more housing,” which advocates giving the counties more authority to make decisions, thus reducing the amount of bureaucracy and preventing the state Land Use Commission from becoming a de facto state zoning commission.

Another was “Build up or build out? How to make housing more affordable,” which recommends “increasing the area of urbanized land and building marketable densities outside of the existing urban footprint,” which currently is about only 5% of all land in the state. For example, an increase of only 1 or 2 percentage points in Hawaii’s urban-designated land would be equivalent to a 20% to 40% increase, respectively, in lands available for more housing.

In addition, the institute has made available a zoning-reform toolkit, “How to Build Affordable, Thriving Neighborhoods,” which explores different ways to increase housing supply and improve affordability by reforming state and local zoning restrictions.

We summarized many proposals from the toolkit in a commentary published in The Maui News, ”50 ways — at least — to update Maui’s zoning code.”

In short, the best way Oahu’s affordable housing shortage would be to address the underlying causes — which, again, as Bill 9 itself states are: “costly construction, long delays for development and permitting, and [not making available] more land for development.”

Thank you for your time and attention, and we hope you will take into consideration this research and our testimony as you further debate the merits of Bill 9.

Sincerely,

Joe Kent
Executive Vice President
Grassroot Institute of Hawaii
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  1. Kam Napier, “Vexed on Honolulu vacancy tax arguments,” Pacific Business News, June 28, 2019.
  2. Emily Cadman and Natalie Obiko Pearson, “Taxing Rich Peoples’ Empty Homes Isn’t Helping the Housing Crisis,” Bloomberg, Aug. 15, 2021.
  3. Karin Larsen, “Empty homes tax not helping rental crisis, generating millions more for Vancouver: report,” CBC, Nov. 29, 2018.
  4. Gordon Hoekstra, “Three years in, has B.C.’s speculation and vacancy tax made a difference?” Vancouver Sun, Nov. 14, 2021.
  5. Camille Squires, “San Francisco is the latest city to consider tackling its housing crisis by taxing empty homes,” Quartz, Feb. 11, 2022.
  6. Attom Data Solutions releases 2020 Property Tax Analysis,” Attom Data Solutions, April 9, 2021. See also, “2020 Property Taxes by County,” Attom Data Solutions, April 9, 2021
  7. “10 Most Expensive States in the U.S.,”  Bungalow, Feb. 1, 2022, and “5 states with the highest and lowest property tax rates,” Bungalow, Feb. 1, 2022.

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