The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the Honolulu City and County Council on April 19, 2023.
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April 19, 2023
10 a.m.
Honolulu City Council Chambers
To: Honolulu City and County Council
Councilmember Tommy Waters, Chair
Councilmember Esther Kiaʻāina, Vice Chair
From: Grassroot Institute of Hawaii
Ted Kefalas, Director of Strategic Campaigns
RE: Bill 61 (2022), Bill 24, Bill 25, Bill 27 and Bill 29 (2023) — RELATING TO REAL PROPERTY TAXATION
Comments Only
Dear Chair and Committee Members:
The Grassroot Institute of Hawaii would like to offer its comments on Bill 61 (2022), Bill 24 (2023), Bill 25 (2023), Bill 27 (2023) and Bill 29 (2023), all of which would adjust the tax classification of long-term rental properties.
>> Bill 61 (2022) would abolish the Residential and Residential A classes and would create “Owner-occupied” and “Nonowner-occupied” classes in their place.
>> Bill 24 (2023) would create a “Long-term lease” class for properties that are leased for 12 months or longer consecutively.
>> Bill 25 (2023) would classify long-term rentals as Residential, exempting rental properties valued at $1 million or more from the Residential A class.
>> Bill 27 (2023) would increase the Residential A tier threshold from $1 million to $1.3 million and create another tier for the value of the property in excess of $2 million; it would also create a “Long-term rental” class for properties that are leased for 12 months or longer consecutively.
>> Bill 29 (2023) would increase the Residential A tier threshold from $1 million to $1.5 million and create another tier for the value of the property in excess of $5 million.
Since all five bills address the taxation of long-term rental properties, we thought you might find it helpful if we condensed our testimony to a single document.
In short, the Institute believes there are two ways the Council could effectively classify and tax long-term rentals.
First, the Council could adopt Bill 25, which would classify all long-term rentals as Residential, regardless of their value.
The advantage of this approach is that rental owners would be taxed the same as homeowners, removing the disparity between Residential and Residential A properties, the latter of which applies to nonowner-occupied properties worth $1 million or more, and many of which are used as long-term rentals.
Second, the Council could pass Bill 61, in addition to another bill, such as Bill 24 or Bill 27, that would create a new class specifically for long-term rentals.
On its own, Bill 61 would not prevent rentals being taxed at high rates. Its language is clear that most rental properties — except low-income rentals or dedicated properties — would fall into the Nonowner-occupied class and be vulnerable to a much higher rate than the Owner-occupied class. Creating a new class specifically for long-term rentals would avoid this concern.
In addition, we want to point out how creating a new class for long-term rentals without passing any other reforms could lead to enforcement problems.
For example, landlords whose properties were valued at less than $1 million would have little incentive to file paperwork to reclassify their properties as long-term rentals, since those properties would otherwise remain in the Residential class.
In lieu of offering a tax incentive such as a rental exemption, the County would have to offer an even lower rate for long-term rentals valued under $1 million than the Residential rate to encourage landlords to move their properties to the new class.
Otherwise, similarly valued rental properties at some point might face different tax bills simply because they are in different tax classifications — a situation that bears a striking resemblance to the current problem with rentals valued at $1 million being subject to much higher tax bills than those valued at $999,999.
Finally, the Institute supports increasing the Residential A threshold from $1 million to a higher value to account for inflation and the ever-increasing property assessments.
The Residential A classification was tiered beginning in fiscal year 2018,[1] when the median value of a single-family home was just $800,000.[2] Since then, the median value of a Honolulu home has increased by more than $200,000, while inflation has increased by more than 20%, pushing many more Honolulu homes into the higher Residential A category.[3]
Thank you for the opportunity to testify.
Sincerely,
Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii
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[1] “Residential A,” Real Property Honolulu, accessed April 17, 2023.
[2] “Statewide Housing Statistics,” Title Guarantee Hawaii, October 2018, p. 1.
[3] “CPI Inflation Calculator,” U.S. Bureau of Labor Statistics, accessed April 18, 2023. Inflation rate between March 2018 and March 2023.
