Bill 42: Assessment caps can distort housing market if too low

The following testimony was submitted by the Grassroot Institute of Hawaii for consideration by the Honolulu City and County Council on Aug. 9, 2023.

August 9, 2023
10 a.m.
Honolulu City Council Chambers

To: Honolulu City and County Council
      Councilmember Tommy Waters, Chair
      Councilmember Esther Kia‘āina, Vice Chair

 From: Grassroot Institute of Hawaii
            Ted Kefalas, Director of Strategic Campaigns


 Comments Only

Dear Chair and Councilmembers:

The Grassroot Institute of Hawaii would like to offer its comments on Bill 42 (2023), CD1, which would impose an 8% assessment cap on properties in the Residential tax class.

In general, the Institute appreciates that this measure intends to protect homeowners from large increases in their property values. However, we do not believe the cap should be set to a figure lower than the 8% proposed in the bill.

Restrictive assessment caps are known to distort the housing market by incentivizing long-time homeowners to stay in one house, no matter their living space needs. These assessment caps also drive up the cost of homeownership for individuals and families looking to purchase their first home.

For example, research shows that under California’s Proposition 13 combination 2% assessment cap and 1% rate cap,[1] homeowners tend to stay in their homes much longer.[2] This is despite the fact that many individuals might want to downsize or move to another neighborhood or city. Basically, an assessment cap essentially disincentivizes homeowners from moving.[3]

To give a picture of how the proposed assessment cap could affect Honolulu homeowners, we examined the gross assessed value of the Residential tax class. Its average annual increase between fiscal 2015 and 2024 was 4.98%. In only two years during that time period did the entire tax class increase by more than 8% — 8.13% in fiscal 2023 and 9% in fiscal 2024.

Because the number of parcels in the Residential class fluctuated between fiscal 2015 and 2024, we also thought it helpful to report the change in gross assessed value divided by the number of parcels. As shown in Figure 1 below, this measurement gives a better picture of how the assessments have increased for individual properties.

Figure 1 below compares the average assessed value of parcels in the Residential class to changes in that value.

Taken as a whole, these facts indicate that the assessment cap would not likely have a significant distortionary effect on Oahu’s housing market.

However, the Council should address the scenario in which a Residential property with the 8% assessment cap moves from the Residential class to the Residential A class by crossing the $1 million threshold.

In such a case, Bill 42 does not clearly describe how the property would be assessed. Would it be immediately assessed at full market value upon crossing the $1 million threshold?

Thank you for the opportunity to testify.


Ted Kefalas
Director of Strategic Campaigns
Grassroot Institute of Hawaii

[1]Understanding Proposition 13,” Office of the Assessor, County of Santa Clara, accessed July 11, 2023.
[2]  Nada Wasi and Michelle White, “Property Tax Limitations and Mobility: The Lock-In Effect of California’s Proposition 13,” National Bureau of Economic Research Working Paper 11108, February 2005. See also Keith Ihlanfeldt, “Do Caps on Increases in Assessed Values Create a Lock-In Effect? Evidence From Florida’s Amendment One,” National Tax Journal, March 2011.
[3]  California propositions 60 and 90 attempted to resolve the concern that older homeowners would stay in the same house in order to keep their tax benefits by allowing homeowners over age 55 to keep their tax benefits if they sold their homes and moved. See “Transfer of Base Year Value for Persons Age 55 and Over – Propositions 60/90,” California State Board of Equalization, accessed July 7, 2023.

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