SB34: Bill aimed at ‘outsider’ home buyers based on faulty premises

The following testimony was presented Feb. 7, 2023, by the Grassroot Institute of Hawaii to the Senate Committee on Judiciary.

Feb. 7, 2023
9:30 a.m.
Conference Room 16

To: Senate Committee on Judiciary
      Senator Karl Rhoads, Chair
      Senator Mike Gabbard, Vice Chair

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


Comments Only

Dear Chair and Committee Members:

The Grassroot Institute of Hawaii would like to offer comments on SB34, which would increase the tax withholding for nonresidents under the Hawaii Real Property Tax Act from 7.25% to 75% for all residential real estate transactions taking place after Sept. 15, 2023.

We would like to begin by noting that the withholdings under the Hawaii Real Property Tax Act HARPTA are not taxes. The law is modeled on the federal Foreign Investment in Real Property Tax Act of 1980 and is intended to ensure that both residents and nonresidents who make money from selling real estate in Hawaii pay their lawful amount of the income tax.

To ensure this, HARPTA mandates that buyers hand over 7.25% of the value of the real estate sale to the state Department of Taxation until tax season. The department then calculates the seller’s income-tax liability and rebates the difference, if any, between the HARPTA withholding and the tax liability.

HARPTA applies equally to Hawaii residents and nonresidents, although resident sellers may waive the withholding by filing a form with the department.[1]

SB34 would increase the withholding for nonresident buyers to 75% of the value of the transaction.

 The premise seems to be that out-of-state real estate buyers are a major cause of Hawaii’s high housing prices, and that increasing their withholding rate would discourage and reduce their purchases. However, this idea is a myth.

A policy brief published in August by the Grassroot Institute of Hawaii, “The ‘outsider theory’ of Hawaii’s housing crisis,” examined national and state housing sales data and found no statistically significant correlation between nonresident purchases and home prices — in Hawaii or any other state.[2]

Many states with low housing prices had high levels of outside purchases and many states with high housing prices had low levels.[3]

On the other hand, the study also examined land-use regulations in states across the country and found a definite link between them and high housing prices.

Not surprisingly, Hawaii has the strictest land-use regulations in the nation — and the nation’s highest median home prices.[4]  These findings echoed a 2022 study by the University of Hawaii’s Economic Research Organization.[5]

Additionally, the Grassroot Institute study discovered that out-of-state and foreign buyers tend to purchase more expensive homes, while Hawaii residents purchase relatively less expensive homes. This suggests that nonresidents and residents are operating in different housing markets, and limiting the sale of houses to nonresidents may not make average homes more affordable.

All that said, another reason to reject SB34 is that there’s a good chance it wouldn’t even achieve its goal. Despite its intention to discourage real estate sales to nonresidents, the relatively high net worth of many nonresident buyers might nullify SB34 as an impediment to their purchases.

HARPTA withholdings are rebated at tax season, so well-to-do buyers can afford to wait longer than the average resident buyer. In addition, this bill may only shift the timing of the sales of high-end residential real estate so that the assets of the buyers are not tied up in the withholding period for longer than a few weeks or months.

Finally, SB34 is constitutionally dubious.

Discriminatory measures against nonresidents — such as the ones targeted by this bill — may run afoul of the U.S. Constitution’s Privileges and Immunities Clause, which provides that “the Citizens of each State shall be entitled to all Privileges and Immunities of Citizens in the several States.”

In prior court cases, the U.S. Supreme Court has struck down state employment preferences for residents and residency requirements for state bar examinations.[6]

In addition, the Constitution’s Equal Protection Clause and Commerce Clause could present barriers to the legality of this measure.

In sum, the best thing you could do regarding this bill would to be put it aside so you can focus on measures that would have a better chance of actually helping to resolve Hawaii’s housing crisis.

Thank you for the opportunity to submit our comments.


Joe Kent
Executive Vice President
Grassroot Institute of Hawaii

[1]Tax Facts 2010-1,” Hawaii Department of Taxation, Revised April 2021, p. 2.

[2] Jensen Ahokovi, “The ‘outsider’ theory of Hawaii’s housing crisis,” Grassroot Institute of Hawaii, August 2022.

[3] Ibid, p. 11.

[4] Ibid, pp. 16-17.

[5] Rachel Inafuku, Justin Tyndall and Carl Bonham, “Measuring the Burden of Housing Regulation in Hawaii,” University of Hawaii’s Economic Research Organization, April 14, 2022, p. 4.

[6]Overview of the Privileges and Immunities Clause,” Article IV, Section 2, Clause 1 of the U.S. Constitution, accessed Feb. 5, 2023.

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